Ben Bernanke, the U.S. Federal Reserve chairman, last month offered a candid assessment of America’s economic prospects. “My best guess is, we will have continued recovery, but it won’t feel terrific,” he told a Washington audience, noting economic growth would be too languid to quickly restore the eight million jobs lost during the recession. The mood has only soured since Bernanke’s speech. Home sales and manufacturing indicators in the United States dropped; filings for unemployment benefits increased. Europe’s debt crisis continued. Statistics Canada reported the country’s GDP stalled in April after seven consecutive increases.
Fear of a double-dip recession, where the economy contracts again after a brief period of growth, is now widespread. But if you ignore the doomsayers for a moment, most economists say the current climate is not unexpected.
“This is endemic of what you get after a recession induced by a financial crisis,” says Craig Alexander, chief economist with TD Bank Financial Group. “The de-leveraging of U.S. households, the de-leveraging in the U.S. banking systems, this does not happen very quickly. It takes place over several years.”
The day-to-day news can be disheartening. The U.S. lost 125,000 jobs in June, but beyond that grim statistic was some reason for optimism. The drop was largely explained by the layoff of 225,000 temporary workers hired as census takers — the private sector actually added 83,000 jobs. In Canada, the job market has recouped three-quarters of its losses, and some provinces are back to pre-recession levels, according to Hendrix Vachon, a Desjardins economist. Roughly 93,000 jobs were created in June, pushing the unemployment rate below 8% for the first time in 18 months.
But as employment numbers crawl higher, there is also an expectation that consumer demand will moderate as Canadians confront rising debt levels. Lower domestic demand, combined with a slow recovery of the export market and depressed commodity prices will likely stall growth overall. Despite the job market, most expect growth to settle between 3% and 4%, a significant drop from the 6.1% increase in GDP experienced in the first quarter.
“That’s after a barnburner of a previous six months,” says Dawn Desjardins, assistant chief economist with RBC. “You’d expect a pause on momentum after really impressive strength.”
Sluggishness may be transforming some investors into pessimists, but consumers are increasingly optimistic. Roughly 67% of Canadians in June believe the outlook for the economy is good, compared with 54% in the previous quarter, according to a survey conducted on behalf of RBC. Anxiety over losing one’s job also appears to be waning, albeit slowly. The survey found 20% of respondents in June have a family member worried about unemployment, compared with 22% in March. “There are some residual worries,” Desjardins says. “We have been through quite an ordeal.”
Recent market swings — along with a fresh round of doomsday scenarios — reflect investors’ anxiety. As the economy sputters back toward growth, it’s likely the economic mood will continue to swing. “Over the next couple of years, we’re going to have a constant tug of war between pessimism and optimism,” says Alexander. “At the moment, we’re just going through a bout of pessimism.”