Recovery Prospects

Provided by East Kootenay Community Credit Union

Signs of economic recovery are emerging after one of the most severe financial crisis in decades. The strength and durability of any recovery are natural concerns given the depth and breadth of the recession and on its policy-driven sources. For example what happens when some fiscal stimulus expires? Will the economy generate self-sustaining growth? Is a fallback into recession, the double-dip recession, likely? Closer to home, how are the East Kootenays faring and what are its recovery prospects?

Equity and commodity markets are well up from their March lows and are fairly reliable precursors of the economy’s performance. Low interest rates stimulate housing activity and consumer spending on durable goods which puts these sectors into the forefront of a recovery and this time is no different. One component of that spending getting a lift from government is new vehicle sales in the U.S., Germany, China, Brazil, and a few other countries.

Other government programs are at work as well. In Canada, the federal home renovation tax credit is helping that sector. A tax credit for U.S. first-time homebuyers is stabilizing the housing market which recently recorded its first price increase since the recession. The large money infrastructure projects have a less immediate impact with activity spread over years. These programs, other than infrastructure related, expire later this year or early next year leaving the housing and new vehicle markets to survive on their own.

Another source of growth comes from the need to rebuild inventories to meet higher sales levels in the recovery. The sharp and deep reaction by manufacturers, retailers, car dealers, homebuilders, and others to reduce production and inventory levels during this recession is reversed during recovery especially in its initial phase. A steep downturn is often followed by a sharp rebound.

The main concern is the temporary nature of these growth sources, including inventory rebuilding, and to what extent the economy will grow on its own in 2010 and beyond. Consumer sales stimulated by government programs usually borrows from the future so some fallback in the first half of 2010 is expected. This does not necessarily mean a return to recession, just slower growth since low interest rates should be a positive force until self-sustaining growth is well-established.

For the East Kootenays and the Fernie area, economic prospects appear brighter than earlier this year mainly hinged upon the improving global economy and low interest rates. Rising Japanese steel production is positive but it is a long road back to normal levels. The same applies to U.S. and Canadian housing starts which are heading higher next year. Coal and forest exports have not yet turned the corner nor has tourism.

Alberta’s economy was as hard hit by the plunge in energy prices as it was lifted during the boom years taking Fernie’s tourism and real estate activity along for the ride. Local demand for real estate is also hit during a recession reflecting the deterioration in the local economy and labour market. The number of Employment Insurance claimants in the East Kootenay RD has more than tripled this year from last year.

The housing market is showing signs of life. Monthly residential sales are rising since the beginning of the year in the Kootenay Real Estate Board area. The powerful effect of record low mortgage rates is enough to override the negative aspects of the economic recession. Unemployment is up but the large majority of the labour force is employed and able to engage in real estate transactions. First-timer buyer activity is probably up since their purchasing affordability is the best in years due to low financing costs and to lower housing prices. Investor activity could also be rising to take advantage of these conditions.

Housing prices are probably past their lows for this cycle since a sustained period of rising sales leads to higher prices with a time lag. Sales prices are firming in the most recent months and this trend continues as long as sales remain at higher levels.

The outlook for the local economy is improving but sporadic across sectors and awaits a stronger revival in its key export markets to bring down unemployment significantly. In the meantime, policy measures and low interest rates are generating growth and improving recovery prospects but a broadly based, self-sustaining economic recovery is not yet on the horizon.