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People stroll by Lehman Brothers Holdings Inc.’s head office in Tokyo. (Katsumi Kasahara/Associated Press)
People stroll by Lehman Brothers Holdings Inc.’s head office in Tokyo. (Katsumi Kasahara/Associated Press)

The global economy’s long climb back to the new normal Add to ...

New vehicle sales reached their highest level since the recession in August at an annual pace of more than 16 million.

Home prices were up 12.1 per cent across the U.S. in June compared to a year earlier, according to the Standard & Poor’s/Case-Shiller index for the nation’s 20 largest cities. Price gains in some cities hardest hit by the housing crash are up more than 20 per cent, including San Francisco and Las Vegas.

More impressive is the improving debt situation of Americans. Household debt was at a decade low in the second quarter, at 90 per cent of disposable income.


A common global response to the Great Recession was to boost government spending. From Ottawa to Beijing, governments pumped up the stalled economy with a surge of fiscal stimulus.

Faced with swollen budget deficits, governments have been cutting ever since.

But there are hints that the worst of the so-called fiscal drag is now easing.

The U.S. budget deficit has shrunk dramatically after peaking at 10 per cent of GDP in 2009. It’s on a course to fall to less than 4 per cent of GDP next year.

The U.S. Congress must still reach a deal by mid-October with the White House to raise the government debt ceiling. But the consensus is that the worst of the U.S. austerity will be in 2013 and the hit to economic growth will diminish in 2014 and beyond.

The IMF warned this week that too much austerity could jeopardize the nascent recovery. “Although policy makers continue to show resolve to keep the global economy away from the precipice, the greatest worry may well be a prolonged period of sluggish global growth,” the IMF said in a briefing paper for leaders at the G20 summit.

In Japan, the government of Shinzo Abe is also due to decide next month whether to push ahead with a plan to raise the national value-added tax to 8 per cent from 5 per cent, a move that risks squelching already weak consumer demand.

And in Europe, the debate between austerity and growth continues as a decision looms this month whether to give Greece more debt relief.


Commodity prices have been mostly weak over the past two years, plagued by sluggish global growth and over supply.

That’s shifted of late. Gold is climbing, while U.S. crude recently hit a two-year high, fuelled by the prospect of better growth in the U.S., Europe and China and amid concerns over oil supply disruptions in the Middle East.

A strike on Syria could add about $15 a barrel to the price of Brent crude, Bank of America estimated last month. Barclays analysts expect geopolitical tension will likely nudge oil prices higher in the coming months.

Higher oil prices have a mixed impact on Canada, but as a general rule of thumb for developed nations, every $10 increase in oil prices tends to add half a point to consumer prices (after two years time) and shave a quarter point off GDP, according to Mr. Elmeskov.

Gold and oil aren’t the only climbers of late. The Thomson Reuters-CRB index, which tracks 19 commodities, rose 2.5 per cent last month, although it’s still down about 20 per cent from levels of 21/2 years ago.

“While it’s too early to say that commodity prices have bottomed, the correction since April, 2011... could be largely over later this year,” said Bank of Nova Scotia analyst Patricia Mohr, who sees higher prices for nickel, zinc and WTI crude in the coming year.

Lumber also looks promising, thanks to a U.S. housing market revival – good news for Canada’s long-beleaguered forestry sector.


Inflation fizzled in the recession and has remained, largely, low ever since.

Consumer prices among developed nations are up 1.9 per cent from a year ago, according to the OECD and have been below 2 per cent throughout the year. Energy and food prices are heating up, but the general picture remains one of subdued price pressure.

That spells relief for consumers, many of whom are grappling with stagnant incomes or reduced work hours. In Europe, for example, “real incomes have benefited recently from generally lower inflation,” the European Central Bank noted this week.

While inflation in Japan made headlines recently – with consumer prices running at the strongest pace since 2008 – prices excluding fresh food are still up a muted 0.7 per cent from a year ago.

Canada’s inflation rate is 1.3 per cent, with consumer prices running below the 2-per-cent mark for the past 15 months. “Inflation in Canada remains subdued,” the central bank said this week, adding that it will return to the 2-per-cent mark “slowly” as activity picks up.

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