Bright Days May Be Ahead

“It’s clear that the U.S. economy is in the midst of a recession but we are really right now in what I think will end up being the worst quarter of that recession,” he said. And the short-term outlook isn’t encouraging. “We are in the middle of what will end up being five or maybe six quarters of essentially zero economic growth,” he added.

However, there is a bright side. Shenfeld drew attention to certain positive indicators and suggested that we’ll see some improvement in financial conditions in the latter part of 2009. For example, he noted that the liquidity crisis is beginning to ease and that job losses in the U.S. so far have not been extensive.

Furthermore, Shenfeld pointed out a number of important differences between Canada and the U.S.—such as the less speculative nature of the Canadian housing market, the stability of Canadian banks and the more cautious attitudes of Canadian consumers—which have helped to protect Canada from the worst of the crisis, adding that there is still room for fiscal stimulus if needed.

Government intervention will also be key to the U.S. recovery, said Shenfeld. He compared the correction in the U.S. housing markets to the housing crisis in Japan in the 1990s, noting that the U.S. government has taken decisive steps to resolve the current situation. “The major source of the correction or the recovery that we see coming isn’t going to be from market forces; it’s going to be from aggressive government action,” he remarked.

In addition, the new U.S. presidential administration, led by Barack Obama, may have a positive impact. Shenfeld expects that there will be another large fiscal stimulus package to further boost the U.S. economy—and that this package will work. “It is not too little too late,” he observed. He added that, whether due to chance or to different slants in policy, “historically, the U.S. economy has grown faster with Democrats in the White House.”

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