Expect ‘risk-filled’ recovery: TD

The global economic recovery is well underway, but there remain significant threats to growth, according to economists at TD Financial Group.

The primary drivers of the recovery have been resurgent growth in emerging markets and stimulative policy measures in more developed countries.

“Initially, central banks and governments responded to the financial crisis like a trauma team — the goal was economic resuscitation and stabilization,” says Craig Alexander, deputy chief economist for TD Bank Financial Group. “The dramatic and coordinated monetary and fiscal stimulus had the desired effect. While it couldn’t prevent the economic contraction, the policy response did blunt how deep the recession became and it laid the foundation for recovery.”

But at some point, these stimulus measures must come to an end: deficits will be tackled through higher taxes and interest rates must rise. It remains unclear that the private sector is prepared to take over as an economic driver.

The end of stimulus spending may slow economic growth regardless of any interest rate hikes, making the jobs of the central bankers ever more difficult.

“The rebalancing in monetary policy must also be done carefully,” says Alexander. “Raising interest rates too quickly will cause the recovery to lose momentum. On the other hand, raising them too slowly will create inflation risks. And either scenario would give rise to market volatility.”

In fact, the strength of the recovery in emerging markets is bringing with it the threat of much higher inflation, accompanied by fresh new asset price bubbles.

“The fiscal and monetary stimulus that has been provided around the world is no longer appropriate for many emerging market economies,” Alexander says. “A key theme over the next two years will be the need for these countries, such as China, to reduce the level of stimulus and lean against the rate of economic expansion in order to avoid the risk of inflation or asset price excesses.”

If the recovery is not derailed by these risks, economic growth in Canada and U.S. will still likely be limited to about 3% for 2010 and 2011, according to TD. While the U.S. struggles with weak consumer spending, the Canadian economy will be constrained by the rising dollar, which could choke off exports to the south.

Meanwhile consumer spending in Canada will slow, as individuals tackle rising debt levels.

That would suit former Bank of Canada governor David Dodge just fine. Writing for the C.D. Howe Institute, he said that Canadians are oblivious to just how much they should be saving to fund a comfortable retirement.

In the report, he estimates the average Canadian should be saving between 10% and 21% of their gross income to fund retirement, and should sustain that savings rate for 35 years. Fortunately, that high percentage includes savings in employer sponsored pension plans.

(03/18/10)