#CBC: “Collapse of Lehman Brothers 10 years ago still looms over Canada’s economy” #Toronto #Montreal #Calgary #Ottawa #Canada
It was additionally a decade in the past as we speak when the fourth greatest funding financial institution within the U.S. — Lehman Brothers — filed for the biggest chapter within the nation’s historical past, setting off a series of occasions that sparked the worldwide monetary disaster.
Lehman’s publicity to a considerable quantity of dangerous debt tied to subprime mortgages led to its demise. Investors pulled cash out of the financial institution, inflicting its inventory to plunge 93 per cent on the day it declared chapter.
The fallout from the nice recession was widespread. Much has modified for the Canadian economic system amid a restoration, however some key drivers haven’t recovered.
Douglas Porter, chief economist at BMO Financial Group, mentioned the Canadian greenback is a basic instance of the weather that “didn’t come back.”
“At one point in 2007, it got up to $1.10 US. Now we find ourselves today at about 77 cents — I doubt it’s going back to where it was,” mentioned Porter.
“Oil prices are probably not going to go back to $100 a barrel.” U.S. crude oil costs have struggled to remain above $70 a barrel this 12 months, at present buying and selling within the $68 vary.
“I think the longer-term interest rates are not going to get back up to kind of levels it was at before the crisis,” he added.
Economists say the gradual tempo of restoration in Canada and far of the world for the reason that international monetary disaster is said to the depth of the final recession.
“I think it’s safe to say that we’re on much more stronger footing now, but this took longer than we would have imagined,” mentioned Bipan Rai, head of North American international trade technique at CIBC Capital Markets.
“There is still a case to be made that we’re still feeling the impact, given that wages still haven’t recovered fully, which speaks partially to the degree of underemployment globally.”
Job market issues
Unemployment charges world wide have been hitting report lows this 12 months. In Canada, the speed hit 5.eight per cent within the first half of the 12 months, which is the bottom degree for the reason that 1970s.
The U.S. charge is under 4 per cent, lower than half the 10 per cent it jumped to in 2009. Across the pond within the U.Okay., it additionally hit 4 per cent, down from greater than eight per cent six years in the past.
But even with labour markets pushing past full-employment estimates, wages have not adopted swimsuit, mentioned Josh Nye, senior economist at RBC Economic Research.
“Relatively slow pay growth has puzzled policy-makers, leading them to revise estimates of just how low unemployment can fall before wages and inflation accelerate,” Nye mentioned. “That has been a factor keeping monetary policy accommodative so late into the [economic] cycle, even as these economies appear to be operating at full capacity.”
The Bank of Canada has raised rates of interest 4 instances because it started its mountain climbing cycle in July 2017, bringing the important thing coverage charge to 1.5 per cent, however that continues to be, traditionally, thought-about low.
There’s no certain issues in life aside from dying and taxes, however I believe the financial cycle is a certain factor, and in some unspecified time in the future we are going to see an financial downturn.— Douglas Porter, chief economist, BMO Financial Group
Adam Tooze, creator of Crashed: How a Decade of Financial Crises Changed the World, mentioned it is extraordinary that it has been years since anybody paid rates of interest.
“Huge quantities of debt have been contracted by borrowers of all kinds — corporations, governments around the world — on the assumption that interest rates were zero or near zero,” Tooze mentioned.
“But, we’re now moving back to something like normality, and we simply don’t know how the world economy, which is constantly changing and undergoing massive growth in emerging markets, how that system functions within interest rates which are more like three, four, five per cent.”
Economists, nevertheless, doubt central banks will elevate rates of interest quickly or considerably to anybody’s shock. Porter mentioned the Bank of Canada’s will increase are a “methodical process” beneath which charges is not going to be a lot greater subsequent 12 months than this 12 months.
What lurks forward
Meanwhile, some are describing the restoration that started in the summertime of 2009 as “long in the tooth.”
“This makes it a very long upturn, and there’s no sure things in life other than death and taxes, but I think the economic cycle is a sure thing, and at some point we will see an economic downturn,” Porter mentioned.
A predicted timeframe for this downturn in Canadian and worldwide economies ranges from one other 12 months or two to extra. Economists say the triggers may very well be a lot totally different this time round, as a result of each financial cycle seems totally different.
“We can always be hit by some unforeseen shock, whether it’s a spike in oil prices or emerging markets chaos, or a full-on trade war — lots of those things could tip the economy,” mentioned Porter “I do believe the possibility for ramped-up protectionism is the single biggest threat to the global economy.”
Royce Mendes, senior economist at CIBC Capital Markets, added that central banks might not have sufficient ammunition this time to revive the economic system, contemplating how low rates of interest nonetheless are.
Past recessions in Canada and the U.S. have required the central banks to chop rates of interest by much more than they’ve the capability to do proper now, he mentioned.
“It’s looking more and more likely that the peak level of interest rates in this cycle won’t leave monetary policy-makers that type of room to ease,” Mendes mentioned. “As a result, the burden will fall to governments to revive ailing economies.”
Note: “Previously Published on: 2018-09-15 04:00:00, as ‘Collapse of Lehman Brothers 10 years in the past nonetheless looms over Canada’s economic system’ on CBC RADIO-CANADA. Here is a supply hyperlink for the Article’s Image(s) and Content”.