Comments: Tim O'Neill
Chief Economist, Bank of Montreal/ Harris Bank
How do you expect the coming recovery to shape up, especially in terms of its strength and the sectors that will lead and lag behind? How have you factored in the uncertainties surrounding terrorist activity and the war?
The recovery next year should be stronger and swifter than the one following the 1990-91 recession. Growth will likely exceed its long-run potential rate (3-3.5%)by the second half of 2002. The initial boost to growth will come from an inventory rebound.The retail and housing sectors will support activity owing to low interest rates. However, neither will generate the type of bounce usually seen in a typical recovery as consumer spending and starts have remained reasonably solid (especially the latter) through the downturn. The high-tech sectors -- particularly telecoms and computer-related activities-- will likely lag behind given excess capacity. The terrorist acts/ war will weigh on consumer and business confidence for a while, possibly muting the recovery in early 2002. However, we have not explicitly incorporated the prospects of further terrorist attacks and/or a broadening of the Central Asian conflict into our forecast.
The profits outlook is a crucial element in the recovery. What is your outlook for profits, and what factors will shape the profits recovery? Do your profit expectations square with those of investors?
Corporate profits are expected to turn positive by the spring once the economic recovery is underway. Firm productivity growth and muted labour cost inflation will help underpin the recovery in profits. Current equity market performance is consistent with a 2nd-3rd quarter recovery in earnings.
Consumers will likely play a major role in the strength of the recovery. In the face of low savings, heavy debts, and sharply reduced wealth, how much can we expect households to contribute economic growth next year? And can we expect any contribution from housing?
Households play a key role in our outlook for a solid recovery next year. Given high debts and low savings, stronger job and income prospects are a precondition for a pickup in consumer spending. Housing will remain a source of strength in the economy amid low mortgage rates. As noted above neither will provide a typical recovery period surge.
Copyright 2001, Bloomberg L.P.
