Aftershocks often very severe frequently follow an earthquake. Subsequent to the financial crisis earlier this year, one may expect aftershocks quite unforeseen by the general public.
Conventional wisdom argues that the feedbacks triggered by the credit crisis are burning themselves out, at least in the financial markets. More likely, the lingering effects of the deep recession of homebuilding and the vast expansion of consumer indebtedness will be extensive and not short-lived.
The virtually unprecedented actions of central banks pumping money into the credit system will not resolve many difficulties. Consumers for too long have been dependent on rising house prices to provide the wherewithal for their spending. Now that house prices are falling, consumer spending will at best stagnate.
The United States continues to be a paramount factor in the global economy, so a slowdown in North America will have repercussions throughout the world economy.
The effects of globalization entailing a tightly linked economy will have a dramatic effect on global demand, despite the recent surge of brisk growth in developing nations, notably China and India. A slowdown there certainly will be felt in Canadian export markets.
Corporate profits for everything from metal producers to the lumber industry will fall well below general expectations. That implies a painful time for stock markets.
Even though the United States central bank has cut interest rates drastically, mortgage rates have not fallen commensurately, and consumer finance rates have hardly budged. Financing of car purchases or big-ticket items will remain stumbling blocks to our economic recovery. Of course, the tremendous increase in oil prices, unless reversed, also will hinder an economic upturn.
Of great significance to Canada is the response to all this is sure to hit commodity markets. They have been the sole surviving bubble over the past decade where we have experienced an increase in the stock market and then in the housing-sector. Yet, by now most are convinced that commodities are in a "super-cycle," with the limited expansion of supply failing to keep up with the rapidly growing demand. The commodity-intensive economies of Asia and the absurdly foolish project of producing ethanol from corn added to soaring demand for food commodities, which have seen prices double in some instances.
Lacklustre economic expansion will take a toll on base metal requirements, such as copper that is so widely used in capital development plans. Also, oil has become a speculative favourite. Prices have risen almost straight up and bear little relationship to supply-demand factors. A major pullback is inevitable.
Finally, the after-effects of the financial crisis will lead to more government regulations of lending institutions whose lax standards have caused so much harm.