Economy remains far from a full recovery, experts say

Financial markets have stabilized and the crisis has passed, but the global economy remains far from recovery, industry experts said at the Canadian Institute of Financial Planners’ annual national conference in Halifax on Monday.

Satish Rai, portfolio manager and senior vice-president at TD Bank Financial Group, said the worst of the financial crisis has passed. He pointed out that credit risk has fallen back into its historical average range, corporate bond spreads have begun to tighten, and market volatility has fallen sharply.

“Financial markets have stabilized, and they’re healing very, very well,” he said.

Benjamin Tal, senior economist at CIBC World Markets, noted that the TED spread — the difference between the interest rates on interbank loans and short-term U.S. government debt — has fallen from a high of 500 basis points at the peak of the crisis to a level closer to normal, at 80 basis points.

Despite these positive signs, the economy remains far from a full recovery, both speakers said.

Rai pointed out that mortgage default rates remain higher than typical norms, and are worsening rather than improving. The unemployment rate also continues to climb, he noted.

Rai expects banks to continue to feel the brunt of the recession in the months ahead as traditional loan losses increase. Such losses will continue to grow in line with the unemployment rate.

Tal noted that consumer confidence remains at exceptionally low levels. Although the U.S. Treasury has increased the money supply by roughly 40% in recent months, the effort has failed to inspire a meaningful boost in consumer spending.

But a positive sign is that consumer spending, though still weak, has improved from the negative growth levels it hit months ago, according to Rai.

“The economy is healing, but we’re not in expansionary mode,” he said.

Tal commended governments and central banks around the world for the extraordinary economic stimulus measures they’ve taken in recent months.

“What governments are doing is the right thing,” he said.

But he warned that the stimulus measures would also have negative consequences. For example, protectionism is likely to arise as the U.S. aims to create jobs within its own economy. In addition, Tal expects to see huge fiscal deficits in the years ahead, and increasing inflation. As soon as consumer confidence returns, Tal said, the quantitative easing would quickly take effect and drive up spending.

“That’s a sure recipe for inflation,” he said.

With such inflation on the horizon, Tal encourages investors to avoid the bond market in the current environment. “I’m staying away from the bond market,” he said.

In terms of attractive investment opportunities, Tal is bullish on commodities. He believes that higher consumer spending levels in such emerging economies as China and India will carry the global economy out the recession and such spending will drive up commodity prices.

Tal considers the energy sector particularly attractive. With oil prices already having surpassed US$60 a barrel in the midst of the downturn, he expects prices to surge sharply higher once a sustainable economic recovery sets in.

TD’s Rai discusses outlook for bonds, economy