2013: Can the USA and Canada Break Out from Economic Stagnation?

This is the time of year when mainstream economists (and a few political economists) make their annual predictions on what is in store for the upcoming year. Last year was the first time that I took the plunge, and I did much better than the mainstream economists. Last year's predictions are on my home page: 2012: The Year the Canadian Housing Bubble Will Burst.

2012 in summary:
(1) There would be very modest growth in the USA – no real recovery from the recession.
(2) Europe would fall into a double dip recession.
(3) The U.S. housing market, deflating, would finally reach a bottom.
(4) The Canadian housing market bubble would begin its deflation process.
(5) The housing market in Regina would not start to deflate due to the steady influx of population. But I added: “This would change if the oil and potash industries were to follow the general decline now evident in world commodity prices.” This happened, and house sales in Regina dipped during the last four months of the year.
Not bad, eh? Five out of five. 

What can we expect in 2013?
Here is what I believe will most likely happen:

(1) The slow recovery in the USA will continue, with the housing sector starting to make a comeback. Most of the standard economic and financial indicators are trending up. However, mainstream economists are nevertheless predicting that real economic growth will be less than 2%. This seems a reasonable assumption.

A successful ten year “grand design” between the President and the Republicans in Congress for increasing taxes and cutting the budget deficit will once again be on the political agenda in late February. Such an agreement is very unlikely and would significantly reduce the federal government’s fiscal stimulus. However, some kind of an agreement must be reached. President Obama’s proposal of additional tax increases plus a $4 billion reduction in federal spending over ten years, if approved, might well tip the country back into recession; at the very least it would reduce growth rates to less than one percent, given the general weakness in the world economy.

(2) The European Union is in a general double dip recession. Even Germany is heading that way. With governments deeply committed to austerity programs, it is highly unlikely that this will change. The political leaders in the EU are primarily focused on preventing the failure of big banks. Political unrest will continue as unemployment and underemployment continues to increase. No solutions are in sight. A collapse in Spain would be a disaster for the EU zone. Non-mainstream political parties and movements will see an increase in their public support.

(3) Japan has now been passed by China as the second largest world economy. The new government is pledging to end the long period of deflation. But how? The value of housing has steadily declined by since the peak in 1989; concerned home owners have been paying down their debt and refusing to spend.  Zero interest rates and quantitative easing have not succeeded in stimulating the economy. John Maynard Keynes called this a “liquidity trap.” Massive public spending and government debt have also failed. Economic growth rates have been only 1%, and Japan has now slipped in another recession. Chronic stagnation continues. Is this the future for mature capitalism?

(4) In Canada, the government of Stephen Harper has been able to escape the worst of the economic decline in the industrialized world. This is primarily due (in my opinion) to their relative success in maintaining the housing market bubble. But this is starting to deflate, as it must. The price of an average house in Canada is now twice that in the United States, with median household incomes about the same. This is a ridiculous situation and cannot persist. House prices must return to their long term average, between two and three times median household income. Across Canada the average price of a house is now five times median household income. This is not a good time to buy a house. In a few years the baby boomers will start downsizing and prices should continue to decline.

Sask potash mines have excess capacity, excess production and face falling prices.

(5) The Canadian economy has also benefitted from the major increase in household debt. The average household debt is now 165% of household income, even higher than in the USA just before the housing crash. If the housing market continues to decline, as projected, it is most likely that households will start to pay down their debts. This is what has happened in the United States. A decline in consumer spending, which seems to me to be most likely, would adversely impact economic growth, which is already quite weak. I cannot foresee any improvement in the rate of Canada’s economic growth in 2013.

(6) During the period of the Stephen Harper government, Canada has benefitted from the boom in the world commodity markets. But commodity prices are now falling, and this will adversely affect the Canadian economy. The oil industry is already cutting back investment and production, as U.S. domestic production increases and prices fall. Oil production in Canada must also decline because of the current bottleneck in the pipeline system. The potash industry has greatly increased its capacity for extraction and now is facing a shrinking world market and falling world prices. It looks like even Saskatchewan will experience a weaker economy in 2013.

(7) On the pipeline issue, I am certain that the Obama administration will now approve the Keystone XL pipeline to the Gulf of Mexico. Construction continues, and Nebraska has proposed a new route which is less of an environmental threat.  I fully expect that the National Energy Board will approve the Northern Gateway pipeline to the B.C. coast, with a number of significant qualifying conditions. This may swing public opinion in B.C., whose economy needs a boost. If so, I would not bet any money on a new B.C. NDP government remaining in strong opposition to the pipeline. NDP governments across Canada have a history of surrendering to threats from business interests.

(8) On the political front, there could be significant changes with a new leader for the federal Liberal Party. It is assumed everywhere that Justin Trudeau will be selected. The earliest polls indicated that if elected leader the Liberals would pass the NDP as the most popular federal opposition party and provide a serious challenge to the Harper government. Given his stand on the need for a serious national policy on climate change, and his stated desire to see a return to the peacekeeping tradition of the Lester Pearson era, it was assumed that he would lean to the left. Polls show that these two policies are very popular among Canadians. However, Trudeau then backed the Chinese takeover of Nexen Oil and stated his opposition to gun control legislation. Both cases involved a move to the right and against majority Canadian public opinion. Newer polls now suggest that the Liberals under Trudeau will contest with the NDP for the position of opposition party in the House of Commons. Harper et al are elated.

Not much good news. But of course I could be wrong. Economist Nouriel Roubini was quickly labeled  “Dr. Doom” by the mainstream media when he predicted the collapse of the housing bubble in the USA.