Recovery could end up costing Canada: Bootle

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nicolas johnson
From Tuesday's Globe and Mail
Published Monday, Sep. 26, 2011 7:30PM EDT
Last updated Tuesday, Sep. 27, 2011 6:43AM EDT

Roger Bootle has identified a key to achieving that elusive global economic recovery – but Canadians may not entirely like the taste of his medicine.

Mr. Bootle, head of London-based independent research firm Capital Economics Ltd., said rising commodity prices were the single most important cause behind this year’s weakening of the world economy, and lower prices could revive growth. Paradoxically, while a retreat in the cost of food, energy and natural resources would give the rest of the world a break, he acknowledges it would be partly negative for resource-based markets such as Canada’s.

“If commodity prices were to fall back – apart from Canada, of course – it would be a pretty good thing for most of the world because it would put purchasing power back in consumers’ pockets,” Mr. Bootle said Monday in an interview in Toronto before an annual conference organized by Capital Economics.

Commodity producers would be hurt by lower prices for their raw materials, but accelerating growth in Canada’s largest foreign market, the United States, would boost demand for exports of Canadian goods and services, he said. “You’ve got a bit of a two-way pull there.”

The Reuters-Jefferies CRB index of major global commodities such oil, metals and grains has jumped about 20 per cent in the past 15 months. Capital Economics forecasts that Brent Sea crude oil will fall about 20 per cent by the end of next year, but gold (GC-FT1,663.6068.804.31%) will continue rising at least through 2013 – reflecting the firm’s bleak outlook for Europe’s deepening debt crisis, which would continue to drive investors to the safety of bullion.

The urgency of the need to revive global growth is increasing as Europe’s debt mess intensifies. Financial markets worldwide have slumped this year, and accelerated decreases last week on concern that policy makers will be unable to contain the crisis.

“The world faces a toxic mixture of austerity and default, currency instability and depression,” Mr. Bootle told the conference.

He sees a Greek debt default as inevitable, and predicts the larger economies of Italy and Spain may be the next victims in the crisis. Some European banks will collapse and risk infecting the financial system worldwide. Major political obstacles will need to be overcome before any bailout proposals can take effect, and rescue packages will be insufficient, he argued.

“Anyone who’s anyone knows that Greece is going to default,” Mr. Bootle said. “I think the more important issues concern Spain and Italy and the political standoff in the euro zone, with [German Chancellor] Angela Merkel not seeming to be able to put through the measures that are necessary to make the euro zone work.”

Parliaments or courts in the 17 countries that share the euro need to ratify policies, and some have indicated they’ll oppose further bailout measures, Mr. Bootle said. Greek government plans to cut spending have led to violent riots, and elections elsewhere in Europe suggest voters will refuse to pay for the problems of their neighbours. Mr. Bootle expects that Germany will eventually pull out of the euro zone with a few other countries, such as the Netherlands, Austria and Finland.

A recovery will require governments in the most indebted major countries to tighten their belts, but those in Asia’s faster-growing economies could actually be ramping up spending to help turn things around,speakersCapital Economics said at the conference.

Governments should also favour measures to encourage corporate investment and revive consumer spending, and falling commodity prices will make that easier.

“You can’t get out of this by being austere – it simply won’t work,” Mr. Bootle told the conference. “Somebody has got to spend more.”


Roger Bootle speaks his mind

“We’re always quite pessimistic. The big irony is that over the last year, we haven’t been pessimistic enough. Our forecasts have mostly proved too optimistic.”

“The happiest ending would be if Germany decides to leave [the euro], taking with her a group of similar countries – Netherlands, Austria, Finland – and splitting the euro zone in two, north and south. … I suppose the next best is a default by Greece and maybe Greece leaves, and then the rest of the system coheres. But I don’t think that’s very likely. I think the stresses and strains are so great that it’s likely that if Greece leaves, other countries will leave.”

“If Greece is kept in and massive amounts of money are spent to keep it in, then I think the chances of Germany leaving start to grow. I think within a couple of years you could see something like this happening. The point is that this money that’s going to be thrown at the problem by the international institutions is not going to be enough in the end. It’s going to be a `papering over of the cracks’ exercise.”

“Even before the Greek problem burst on the scene, there was a major shortage of aggregate demand in the West, because the banking system is fundamentally broken – we haven’t recovered from the collapse of a few years ago.”

“We’re pretty optimistic about Asia. The key difference is that these countries have got the scope to take expansionary policies, whereas countries in the West have not.”