After war, the U.S. will rebound
Sherry Cooper <a href=www.nationalpost.com>Financial Post Friday, March 28, 2003
I was in New York City this week meeting with institutional money managers. The city is vibrant, alive with the first blush of spring, yet a strong undercurrent of concern is there. Fear of terrorist reprisals has tightened security measures and heightened a general level of awareness. However, New Yorkers are learning to live with it. The streets are still busy, the theatres are full, and outside our offices on Times Square, the pedestrian gridlock is still evident around the clock. While the media emphasizes the rush for gas masks and duct tape, none of that kind of panic is evident to the casual observer.
To be sure, the economy has slowed. The jobless rate in New York City is 8.6%, well above the national average of 5.8%. Office vacancy rates are high in downtown Manhattan, as there was a net decline of more than 43,000 jobs last year, battered by layoffs in virtually all sectors except health care and social services. Tourism is down sharply so hotel occupancy rates remain low, and big-name restaurants are offering discounts. Even reservations are easy to get.
All over the United States the loss of business and consumer confidence is palpable. The war seems less distant and less like a Star Wars video game. The euphoria evident in the first few days ended last weekend as casualties mounted, prisoners were taken and the Iraqi Republican Guard and Fedayeen fought back hard. The stock market surge culminating in the melt-up last Friday was sharply unravelled early this week. Yet gold prices, at US$330 an ounce, remain well below the US$389 level posted in February. Oil prices, as well, have come off their peak despite disruptive unrest in Nigeria and continuing concerns in Venezuela. And the U.S. dollar has barely changed from where it was before the war began. Of course, all of this could deteriorate rapidly if Iraq were to use chemical weapons, or attack Israel, or if terrorist attacks on American soil were to begin again.
In this potentially inflammatory environment, traditional economic analysis can go only so far. All standard models would suggest that the economy should be rebounding as we move into the second half of this year, and I still believe that it will. But as Alan Greenspan and Company suggest, it is difficult to assess the risks as long as the war is still going strong. And in many ways, the risks are imponderable -- scenario analysis and worst-case planning become almost unfathomable in a world where weapons of mass destruction could suddenly annihilate thousands, or maybe even tens of thousands. So what is the ordinary investor, consumer or business manager to do?
Canada is, in many ways, isolated from the worst of the psychological effects of post-terror turbulence and war. We may be kidding ourselves, but we believe our cities are safe, our children are invulnerable, and our government is neutral, even anti the American position. Yet we know that al-Qaeda cells exist in Canada and that budding terrorists may have moved through our borders into the United States. Moreover, 85% of our population lives within 300 km of the U.S. border, too close for comfort for many.
And perhaps the biggest risks lie in our economic dependence on the United States, a point driven home by the attention given to comments by Paul Cellucci, the U.S. ambassador to Canada, earlier this week. Delays at the border are already costly, and no doubt more stringent inspections will come. Should the United States suffer another domestic attack, draconian measures might well be taken to protect and insulate the country. With 33% of our economy in exports to the United States, any disruption in the transport of goods, services or people would be a devastating blow to our otherwise buoyant economy. We got a minor taste of that in the final quarter of last year when growth slowed to a mere 1.6% thanks to a marked weakening in automotive exports.
Canada is not alone in its reliance on the United States. Never before has the global economy been so U.S.-centric, as no other economy in the world could replace the United States as the importer of last resort. We cannot internally generate the economic power necessary to sustain our rapid employment growth and maintain our high level of confidence -- neither can Europe or Japan. So we are all in this together. It is not their problem, it is our problem, the problem of all supporters of order and freedom.
I'm optimistic. I believe the Americans and their allies will prevail. That the war will end in the next couple of months and order will be established in Iraq. The rebound in economic activity will be sizable and sustained. Stocks will rally and bond yields will rise. Oil prices will fall further and U.S. businesses will once again invest in their future prosperity and expansion. I have been telling this story here all week and mostly it falls on a very receptive audience. For all our sakes, let's hope I'm right.
Sherry Cooper is global economic strategist and executive vice- president, BMO Financial Group.