Podcast 48 Transcript: Economic Update with Sherry Cooper

Written by Ian Portsmouth

Ian:  Welcome to the Business Coach Podcast, an advice-oriented series that tackles the top issues and opportunities facing Canada’s small businesses.  I’m your host, Ian Portsmouth, the Editor of PROFIT Magazine and we’ve developed this podcast in cooperation with BMO Bank of Montreal. 

If one thing has become certain through all the economic uncertainty of the past six months, it is this “Canada is in recession”.  Now, that’s not news or of much comfort to Canadian business owners who now want to know when we will get out of this recession and what the business landscape will look like once the economy rebounds and of course once governments have deployed their massive stimulus programs.  To help us cut through the fog, we’ll speak to one of Canada’s best known and most respected economic analyst, Sherry Cooper.  Sherry is Executive Vice-President of BMO Financial Group and Chief Economist of BMO Capital Markets.  She joins me on the line from her office in Toronto.  Sherry welcome to the Business Coach Podcast.

Sherry:  Thank you, nice to be here.

Ian:  So, we’ve heard some talk in the last couple of weeks about the U.S. economy turning a corner, in your view, is this real or imaginary?

Sherry:  Well, I wouldn’t say that it’s turning a corner yet, but there are signs now that there is a swelling in the deterioration of the U.S. economy.  Now that might sound a little strange but it means the U.S. economy is still contracting but nowhere near the degree that we saw late last year and even over the course of the entire recession which has been since December of 2007.  There is evidence now that retail sales have picked up a little, that housing market activity has improved a bit and that capital spending by businesses is heading upward.  But, all these things are still tenuous and unfortunately I think that we still have a few more quarters of recession yet to go.

Ian:  I also noticed that consumer sentiment has bounced up a little bit but it is still at very low levels.

Sherry:  That’s right and of course, we would not expect to see the U.S. economy contracting at a 6% annual rate for very long.  That was the pace of contraction in the fourth quarter and it was probably almost a tie in the first quarter, that level of contraction.  That is unsustainable because people can only cut spending by so much.  But I do think though that the U.S. economy is in a bottoming process and that by the fourth quarter of this year, we’ll start to see small but positive growth.

Ian:  And how closely will our recovery be tied to the U.S. recovery?  Do you see that happening Q4 of this year or slightly thereafter?

Sherry:  I think it will also be in Q4 of this year.  The Canadian economy of course is very closely linked to the U.S. economy both through our exports as well as through just financial market developments.  But, we have been in better shape than the U.S. for quite some time.  Our recession did not begin until late last year.  We also have not experienced nearly the meltdown especially in the housing sector and the financial services industry and as well even in general unemployment, we haven’t been hit nearly as hard.  But that doesn’t mean though that it isn’t very painful especially in the manufacturing sector, anything related to automobiles and the general level of consumer spending in Canada has also slowed quite a lot.  So I would say that for both the United States and Canada, the economies will bottom and they’re likely to begin to improve and show some uptick by the fall of this year.

Ian:  Just so our listeners know, Sherry, we’re speaking in late April 2009, just a few weeks ago, the new Federal fiscal year began and that means that Ottawa has started to put some of its stimulus money out into the field.  When do you suspect that this money will start to take hold at least a noticeable hold on our fortunes?

Sherry:  Well, it probably already has had a small effect.  People now have a tremendous incentive to do some home repairs, do some renovations.  We have seen that money has been dispersed throughout the country for infrastructure spending but it’s a slow process and I think it’s going to be quite gradual.  The thing that has impacted the economy and very much so has been the dramatic decline in interest rate.  Well, we have seen mortgage rates declined sharply, we’ve seen literally across the government yield curve, interest rates are very low and the Bank of Canada has now taken the overnight interest rates down to its lowest level in history, so more good news in terms of borrowing costs.  The real problem is of course that demand for credit has plunged because people aren’t spending as much and also credit availability is in question for businesses that are unfortunately in the process of seeing a significant contraction in their sales and profits.

Ian:  Now, something that could affect interest rates in the future is connotative easing where central banks acquire assets from the economy.  We’ve seen this in the U.S., the U.K. and Japan among other nations and of course this always stokes inflation fears and interest rates can be tied to inflation.  Do you see the Bank of Canada doing much in the way of quantitative easing as we have been hearing in the last few days and does this necessarily mean we’re going to see significant inflation in the future?

Sherry:  Well, I do think that the Bank of Canada will engage in quantitative easing which we’ll be able to see directly through the growth of money supplies which has already increased sharply.  But I do not think this is going to be inflationary, I think it’s going to be inflationary for the United States or Britain either.  And that’s because, though the supply of money is rising, the demand for money seems to be infinite.  People are taking basically the money, the excess cash out there and they are hoarding it, they are hoarding it at banks and in businesses and in their own household.  Now, that’s not a bad thing, in fact, at this stage given the dramatic decline in household net worth especially in the U.S., people want to rebuild their savings.  And they’re risk adverse.  So instead of putting it into the stock market for example, many people are putting it into short-term deposit and other money-like assets.  So that will continue for some time, that does not put up more pressure on prices and in fact we’ve just seen a monthly CPI number for the United states that says the first year over year declined in the overall consumer price index in history.  So, that’s pretty dramatic evidence that there is still downward pressure on prices.  And anyone wants to look into their expenses, I can tell you that a lot of businesses and service providers are willing to negotiate where once before, they didn’t feel the need to be competitive, now everyone is under pressure to reduce their prices so that they can remain competitive in a very weak economy. 

Ian:  I want to talk very briefly about China.  Commodity prices plunged last year and they bounced back a little bit and they have been holding kind of steady, this is partially due to China which is stock-piling commodities, that will end at some point in time, so where do you see commodity prices going in the mid-term?

Sherry:  Well, mid-term this year, I think that oil prices which are now just shy of $50 a barrel will average about $50 for the year, as a whole, so not much movement.  Next year, probably something close to $65 as the global economy does begin to rebound and especially of course in China.  But China is the number 2 consumer of oil, the number 1 consumer of oil is still the United States.  And so, rebounding U.S. economic activity is an absolute requirement for any sustainable meaningful upward pressure on most commodity prices.  Cooper prices have been up this year, gold prices remarkably have been well below where certainly I would have expected given the breadth and the depth at the prices.  Gold has not been responding as the safe haven and probably because inflation pressure is so modest.  The U.S. dollar has been actually quite strong over much of the last six or seven years.

Ian:  Now that we spoke about commodity prices and the interest rates, where do you see the dollar going?

Sherry:  Well, our currency will move very closely to commodity prices, particularly oil and given I think, we’ve got a fairly stable oil picture over the rest of this year, the Canadian dollar will continue within its current trading range.  It can be quite volatile though.  We’ve seen the dollar down into the $0.77 rating not too long ago and we’ve seen it as high as $0.82 even almost $0.83.  So it’s fairly wide band but a breakout on either that end would take a significant shock to the system which I don’t think we’re in a position to predict at this point.  Longer term, as the severity of the financial crisis eases and economic activity rebounds, I would guess that the Canadian dollar may have some upward bid, especially if commodity prices rise.  I doubt however that we are going to see a return to parity anytime in the foreseeable future.

Ian:  And just briefly, it has been a crazy couple of years.  Do you see more volatility in our future or is the roller coaster leveling off a bit?

Sherry:  Well, measure of volatility has come in a bit but certainly from an historical perspective, we still have a great deal of volatility and probably will continue to for quite some time.  I think there is permanent fallout from the crisis, this isn’t just a cyclical phenomenon but indeed there has been a major seen change in the way that financial markets will function in the future and certainly and a seen change in the psychology of business and consumers.  I think we will see less in the way of credit expansion, we’ll see many households attempting to rebuild savings to pay down debts, the demographics argue that there are many boomer families that will hit their maximum wealth accumulation years and as well that have been pounded badly by the decline in the stock market and especially in the U.S. by the decline in the housing market.  So, at the end of all of this, we will see a deleveraged economy worldwide and with less leverage, that means that rates of return and rates of growth will be lower than they have been in the past couple of decades.  So, the boom years from even as long ago as 1982 till about 2005, that kind of growth prospect is unlikely on a sustained basis in the future. 

Ian:  Sherry, that’s all the time we have.  Thanks for joining the Business Coach Podcast.

Sherry:  My pleasure, thank you for inviting me.

Ian:  Sherry Cooper is Executive Vice-President of BMO Finance Group and Chief Economist of BMO Capital Markets.

That’s’ it for another episode of the Business Coach Podcast.  Be sure to check out other episodes which you can download from, and iTunes.  If you have any comments or suggestions about the podcast, please send them to me at

Until next time, I am Ian Portsmouth, the Editor of PROFIT Magazine, wishing you continued success.

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