Faculty experts predict modest economic recovery as investor and business confidence trend up
December 08, 2010 – KINGSTON, ON – Queen’s School of Business professors made their economic predictions for 2011 at the 29th annual Business Forecast Lunch today in Kingston, Ontario.
Overall, the panel predicts a slow, but modest, recovery from the recession despite the fact that the strength in equity markets will likely wane. In the coming years, the size and buying power of the North American middle class will start to decline. Closer to home, Kingston needs to embrace more economic development to realize a bright future.
The panel noted that last year’s predictions were surprisingly accurate given the uncertain economic environment at the time. A summary of each panellist’s 2011 forecast is included below.
“Recovery from the recession is shallow, but is picking up steam,” said Finance Professor and Business Forecast Lunch moderator Lew Johnson in his macroeconomic forecast.
Professor Johnson reported that investor confidence and business confidence are both trending up. However, while unemployment rates are down considerably, most new jobs are part time, which means the recession isn’t entirely over yet.
Going forward, he predicts a modest recovery, with strengthening job markets and moderate increases in interest rates and the inflation rate. The Canadian dollar exchange rate should remain near current levels. The exchange rate along with commodity and energy prices will be key drivers for economic growth.
“Canada, as a small, open-economy, trade-dependent country, is very susceptible to global factors, in particular the weakness of the US recovery, the financial uncertainty in Europe, and the economic uncertainty in China and throughout Asia.”
“Considering the economic uncertainty that prevailed throughout 2010, North-American equity markets have delivered a surprisingly good performance,” said Professor Louis Gagnon, Associate Professor of Finance, who presented on the financial markets perspective.
Professor Gagnon reported that in the last 12 months, the TSX and the S&P 500 indexes were 7.4% and 8.1%, respectively, year-over-year, but that gains in 2010 look pale in comparison to those made in 2009 (TSX: 27.2%; S&P 500:19.7%). In fact, both indexes are still down from their pre-crisis peaks.
“In spite of this year’s advances and last year’s inexplicably high performance, neither market has recovered ground lost since the credit market meltdown,” said Professor Gagnon.
He explained that the persistently high unemployment rates in the US, the foreclosure debacle, and the US Federal Reserve’s latest round of quantitative easing (QE) are casting doubt as to whether the economic recovery is self-sustaining.
Professor Gagnon cautioned investors, noting that the mounting US budget deficit, uncertainty surrounding the future of the Euro, and recent policy tightening in China to cap rampant inflation mean that governments and monetary authorities are running out of options. His presentation reinforced the notion that “we are living on borrowed time.”
“Against this backdrop, the prospects for continued strength in equity markets are rather dim,” said Professor Gagnon. “Equity markets are facing significant down-side risks over the coming months, if not years, and, going forward, this is likely to stimulate more demand for safe-haven assets such as gold.”
Strategic outlook: Managing for the economic recovery
“Canadian businesses have adapted to the temporary shocks of the recession and are now surviving reliably in what will be, for five years or so, the recovery economy,” reported Douglas Reid, Associate Professor, International Business, and Distinguished Faculty Fellow in Strategy. “For planning purposes, consider this to be the “new normal,” and expect 2011 to be a replay of 2010.”
With the decline in the size and buying power of the North American middle class, Professor Reid offered some pragmatic advice for businesses in 2011: Define your business model and innovate over the next two years. “There is still some growth waiting to be taken,” he said. “Ask some provocative questions about the future and, preferably, do something if you don’t like the answers.”
Professor Reid also suggested that companies have a low-cost product offering ready in three to five years’ time, given the erosion of the North American middle class, or they should become prepared for intensifying competition in the middle- and upper-market tiers. Finally, he recommended businesses be prepared for acquisition, whether on the buy or sell side.
“Relative to other cities across Canada, Kingston has fared better than most through the recession, including some of the lowest unemployment rates anywhere in Canada,” said Shai Dubey, Lecturer and Director of the Cornell-Queen’s Executive MBA program. Mr. Dubey is also the outgoing Chair of the Kingston Economic Development Corporation (KEDCO).
Mr. Dubey was optimistic about the groundwork that the city has prepared for its future. “Replacing aging infrastructure, developing comprehensive plans for growth, and working with institutions of higher education, agencies and industry to define areas where the city has competitive advantages for growth and sustainability all bode well for future of the city,” he said.
Looking to the future, Mr. Dubey noted some of the challenges he predicts for Kingston such as the aging population and the difficulty in retaining qualified 20 to 40 year olds because of the lack of full-time jobs for this demographic. He also noted that the city is not attracting immigrants at the rate of other cities, which he sees as a huge disadvantage for future prosperity.
“If we do not embrace and prepare for change, we will be a city in decline rather than a city with a bright future,” concluded Mr. Dubey.
The Business Forecast Lunch was founded 29 years ago by Queen’s School of Business professor emeritus Merv Daub to establish an important link between the School and the Kingston business community. Visit http://business.queensu.ca/news/docs/BFL2011.pdf to view the Business Forecast Lunch presentation.
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