Economic analysis


A weekly scorecard on the state of the economy in North America and beyond

EconowatchThere are many signs of rising confidence in the air lately, from the return of real estate bidding wars to new equity offerings and takeover deals. But the surest sign of an economic spring is this: debt is rising again.

This might not sound like good news. The word debt strikes fear in the hearts of millions of Canadians. After all, we’ve spent the past 18 months hearing that debt is terribly dangerous. Debt will curve your spine, clog your arteries and stain your teeth. Debt, we’re told again and again, is what got us into this mess in the first place, and if there was one positive that emerged from the Great Recession of 2008-09, it’s that it forced a massive worldwide flushing of toxic loans from the system—like a warm water enema for the world economy.

That’s all true to a point. For a decade, much of the world laboured under the happy myth that all loans were good loans. It doesn’t matter if Sally Jones is unemployed with no savings. She can get a $400,000 mortgage because rising real estate values will always protect the principal. And besides, financial magic can make that risky loan disappear from your balance sheet in no time. The market collapse exposed all this as the financial snake oil it always was.

Nevertheless, whether we like it or not, we live in a credit-based economy. People, companies and governments buy things with price tags that exceed their bank balances. Store financing for major purchases has become commonplace, credit cards are ubiquitous, and we’re not about to return to the days when people bought cars in cash. If people are spending, that means they’re borrowing.

And so, it was welcome news that Canadian households took on almost twice as much new debt in the second quarter of this year as they did in the first three months of 2009. Those totals ($26.5 billion in new borrowing, $17 billion of it going to new mortgages) are still below the levels seen in the same period in 2008 and 2007, but they’re moving smartly in the right direction.

There have been many insights to draw from the ordeal of the past year, but if the most powerful lesson is that borrowing should be avoided at all costs, then we have missed the point completely. Shakespeare’s admonition to “neither a lender nor a borrower be” had it all wrong. Borrow what you can afford to repay. Lend what you can reasonably expect to recoup. Do that, and this recovery will hold. Otherwise we’ve simply traded one kind of crisis for another.

GRAPH OF THE WEEK: U.S. Borrowing plunges
Canadian debt is rising again, but in the U.S., consumer credit is falling at an alarming rate. It fell by five times as much as forecast in July, marking the longest series of declines since 1991. Economists say restrictive lending and job losses are to blame.

U.S. Borrowing plunges


Going public at last
Canada’s nine-month drought in initial public offerings has ended. Dollarama Group, the dollar-store chain, is going public on the Toronto Stock Exchange with an IPO that could be worth $300 million. It will be the third big public offering in Canada in the last three months. The mortgage insurance company Genworth MI Canada and the power company Magma Energy also listed on the TSE this summer.

Big spenders once more
The mighty U.S. consumer is spending again. Retail sales in August were up 2.7 per cent, led by increases in automobile sales, which surged more than 10 per cent, and gas sales, which are up five per cent. Much of the increase was due to the cash-for-clunkers program in the U.S., but other key areas, like electronics and clothing stores, also experienced a jump.

Happy homes
There are more signs of life in the Canadian housing market, with the price of new homes up in July. While prices are still down by about three per cent compared to last year, the surge marks the first monthly increase since last September. Among the winners were the markets in Vancouver, Calgary, Hamilton, Windsor and Edmonton.


Help not wanted
The jobless rate in the U.S. is as ugly as ever, with unemployment up to 9.7 per cent as of August. According to the U.S. Bureau of Labor Statistics, there are now 14.9 million unemployed Americans, more than double the 7.4 million who were jobless when the recession began. For every job opening, there are now more than six job seekers. Still, the rate of decline has moderated somewhat in recent months.

Our deflating hopes
The Canadian consumer price index for August is widely expected to show negative annual inflation for the third straight month. TD Economics predicts that inflation will remain negative for a while longer due to “weak domestic fundamentals and soft labour-market conditions.” Core inflation, which strips out fuel, food and other volatile items, was at 1.8 per cent in July. It’s expected to decline in August and continue declining into next year.

Under capacity
Canadian industries are now operating at their lowest level of capacity on record. The rate of capacity utilization fell 2.8 per cent in the second quarter—the eighth straight quarterly drop—and is now below 70 per cent, according to Statistics Canada. Twenty of the 21 major manufacturing groups experienced declines. The capacity rate is the ratio of an industry’s actual output to its potential output.



  • The Cayman Islands, one of the world’s leading tax havens, is broke. It once had one of the world’s richest populations, but is now in such dire straits it may not be able to pay is own civil servants. The island nation has appealed to the British Foreign Office for a loan, which was refused, but Britain may still be forced to bail it out, even though it has a long history of helping British citizens evade taxes.
  • The amount that students are borrowing to go to college shot up by 25 per cent last year in the U.S. as students struggled to find work to pay for school. In Canada, the unemployment rate for students was more than 16 per cent last month. Financial hardship among students could be one of the downturn’s biggest hangovers, as young graduates are forced to delay major purchases, like cars and homes, and put off major decisions, like marriage and having children.


It has been one year since the global economy fell to pieces, and U.S. Federal Reserve Chairman Ben Bernanke is now officially calling the American recession over. But has Wall Street really learned its lesson? American President Barack Obama—and many others in the financial world—aren’t so sure.

“From a technical perspective, the recession is very likely over.” —Ben Bernanke, chairman, U.S. Federal Reserve

“Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them. They do so not just at their own peril, but at our nation’s.”—U.S. President Barack Obama

Robert Kapito“It’s very easy to fall back into old habits very quickly, and some firms are making profits and adding risk to their portfolios.”—Robert Kapito, president, BlackRock Inc.

“We should know now that greed is not good.” —Roger Bootle, managing director, Capital Economics

Shiller“People will accept change at a time of crisis, but we haven’t managed to do much, and maybe complacency is coming back. We seem to be losing momentum.”—Robert J. Shiller, economics professor, Yale University

“We have to change the rules and correct the fundamental flaws in the financial system.”—Kenneth C. Griffin, founder, Citadel Investment Group

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