Fortune favours the bold – but not always as soon as the bold would like or expect.
Peter Hall, chief economist at Export Development Canada, decided to be bold last autumn, predicting the U.S. economy would expand about 3 per cent in 2013, which would be the fastest since at least 2005.
Mr. Hall has had to dial back.
Washington’s budget cuts were deeper than he expected, removing a significant amount of public spending from the calculation that determines gross domestic product.
Mr. Hall now expects the U.S. economy will expand 2.3 per cent this year. That still is relatively optimistic. The International Monetary Fund last week cut its outlook for U.S. growth to 1.9 per cent from 2.1 per cent.
But Mr. Hall’s overall enthusiasm for the U.S. recovery hasn’t dulled.
“Fiscal withdrawal” will erase the equivalent of almost 2 per cent of GDP this year, meaning the rest of the rest of the U.S. economy is expanding at a pace that exceeds 4 per cent, he says in his spring global economic forecast.
Mr. Hall says that momentum will gain speed as the year moves on, leading to growth of 3.3 per cent in 2014. (The IMF sees 3 per cent.)
Some might fault Mr. Hall for getting ahead of himself.
It is fair comment to point out that there’s little point in expecting much from the U.S. as long as unemployment remains high.
And then of course there’s the government. One also could argue that it was folly to bet Congress and the White House would properly manage budget crises like the “fiscal cliff” and sequestration.
Mr. Hall seems prepared for such criticism. The text of his report drifts from economic analysis into psychology.
He asks whether we’ve become obsessed with every little bit of negative information, creating a negative feedback loop that is depressing investment and spending, if not the broader population.
“It’s entirely possible that we are talking ourselves into a new, slower reality through that nasty trait of pessimism to become self-fulfilling,” he writes.
“There are several key ways this shows up in the market. First, it creates a `you first’ mentality that produces few, if any, takers. Second, it leaves many in the economy unprepared for growth, and the resulting short-term constraints prove to inhibit the actions of the adventurous and ward off the more shy onlookers. Third, it produces an overreaction to shocks, and we’ve had more than our usual dose of these in recent years.”
Recall Bank of Canada Governor Mark Carney’s “dead money” remark in reference to Corporate Canada’s hoarding of cash.
Mr. Carney wasn’t telling executives what to do with their money.
He was telling them that they were behaving as if paralyzed by irrational fear. If the financial crisis showed anything, it is that governments and central banks are willing to backstop the financial system. Canada’s banks were strong.
The euro zone debt crisis is ugly, but don’t make things worse than they are. That was Mr. Carney’s message.
You could see something similar happening around the release of data last week that showed China’s economy slowed to an annual rate of growth of 7.7 per cent in the first quarter. Commodity markets fell on the news. Expectations for global growth were cut.
Okay, so the years of double-digit growth are over.
Growth forecasts will be revised because the math of less output from the world’s second-largest economy will demand it.
But growth of 8 per cent still is a lot of growth. And almost everyone agrees that China’s economy must slow for its own sake.
The shift appears to be happening at least in part because the government is curbing the unsustainable ascent of housing prices, slowing investment in an economy that already has plenty of capacity and taking steps to encourage domestic demand.
These are good things.
It’s entirely possible that Mr. Hall is too sanguine about the risks in the global economy. But that’s an assessment that should be based on the facts, not despair brought on by years of disappointment.
So here are Mr. Hall’s facts: Export Development reckons the excess supply in the U.S. housing market left by the collapse of the housing market in 2007 has been absorbed, and construction now is 40 per cent higher than year-ago levels; households are spending at a sustainable rate without taking on new debt; banks appear more willing to lend.
Those are the hallmarks of a normal recovery. To be sure, the unemployment rate, at 7.6 per cent, is a drag on growth. But the U.S. economy is creating jobs, and a rebound in housing, steady consumer spending and increased bank lending will only support that trend.
On balance, that seems reason to let optimism trump pessimism. At least until the facts change.