Fears of a “double-dip” recession surfaced again Monday as investors and economists expressed concern that massive government stimulus has succeeded in stabilizing economies, but failed to trigger lasting growth.
The growing suspicion that recent advances in several big economies are not sustainable swamped the good news Monday that Japan technically emerged from its longest slump in 60 years by posting an impressive 0.9 per cent advance – 3.7 per cent annualized – in the second quarter.
Last week, Germany and France also reported positive growth in the second quarter, officially ending their recessions.
Still, world stock markets tumbled Monday. In Toronto, the Canadian market’s key index fell more than 316 points or nearly three per cent, as investors worried about the impact of falling energy prices on Canadian resources stocks.
“The recovery is basically on the back of massive fiscal (government) stimulus,” noted economist Sal Guatieri of BMO Capital Markets.
“We should be happy relative to where we were three months ago with the global economy on a landslide downward, (but) we’re still far from durable, strong recovery.”
In a television interview Monday, Finance Minister Jim Flaherty underlined the importance of his government’s actions in supporting the economy, saying Canadians are starting to see an increase in construction activity from the federal infrastructure fund.
The worry, however, is that when the trillions of dollars countries are pouring into their economies run out sometime next year, whatever growth generated from the artificial spending will disappear, plunging the world into a second slump – hence the term “double-dip,” or “W-shaped” recovery.
Prime Minister Stephen Harper also cautioned last week about taking too much for granted from Bank of Canada governor Mark Carney’s forecast that growth will return during the current quarter – the July to September period.
Derek Holt, vice-president of economics at Scotiabank, calculates the odds of a double-dip occurring late this year or possibly early in the next at about 70 per cent.
His reasoning is that economies are currently being driven by both government stimulus and the “one-shot wonder” of expanded production to restock inventories, both temporary phenomena.
Once those effects wear off, economic activity could easily fall back.
“Everyone in the markets was hoping for a classic recession replay where you come out of it with three, four, five per cent sustained quarter-over-quarter growth, (and) they are likely to be disappointed,” he said.
While there remain reasons for encouragement, economists say, not until consumers return to a buying mood, particularly those in the United States, can it be declared in any meaningful way that the worst global downturn since the Second World War has ended.
And that has not occurred yet, they add.
The latest retail figures from south of the border finds the U.S. consumer still in a savings mode, cutting core purchases in July by 0.6 per cent. The only bright spot in the picture was car purchases spurred on by the attractive “cash for clunkers” subsidy.
With household wealth having taken a US$13-trillion hit since mid-2007, U.S. consumers are likely too shell-shocked to be counted on to sustain a recovery, unless they are bribed into spending through government largesse, say economists.
A new senior loan officers’ survey in the U.S. confirmed that even as credit conditions are improving, ever so slightly, consumers have no stomach for taking on more debt even at historic low interest rates.
Canadian households are faring better than their American counterparts, but they too are facing tight finances and deteriorating employment prospects.
“I think the evidence is showing that we need to keep the stimulus on for awhile yet, including low interest rates, until the private sector has joined in,” said Avery Shenfeld, chief economist with CIBC World Markets.
“We think we’ll see some contribution from private sector spending in 2010, but not strong enough to justify tightening interest rates or returning to a very tight fiscal policy environment.”
That would mean sluggish growth going forward, but Shenfeld is not completely sold on the double-dip scenario. He says that would be a serious risk if governments make the unlikely mistake of tightening monetary and fiscal policy too soon.