Can the insurance community solve the recession?

Insurance investors gathered to hear a panel of experts explain why the recession continues to linger – and the message for prosperity boiled down to one word.

Risk Management News

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Insurance investors gathered to hear a panel of experts explain why the recession continues to linger – and the message for prosperity boiled down to one word.

Invest.

“Are we truly out of the recession? For sure… if you are an economist,” says Dan North, Chief Economist, at Euler Hermes. “Most people when they say ‘are we out of the recession’ mean that times are good. For an economist, saying that a recession is over simply means that things have stopped getting worse.”

North – who is best known for having accurately predicted the 2008 recession and its implications for today – was one of a three-man panel at a recent Receivables Insurance Association of Canada (RIAC) panel discussion, ‘The Great Recession: Are we truly out of the woods?’ that brought together insurance and financial industry professionals from around Ontario, examining the implications of the current economic situation, and what it means for their clients.

“This is the first event of its kind for the Receivables Insurance Association of Canada,” says Brad Hébert, chairman of the RIAC. “Property and casualty brokers, bankers and businesses are all starting to understand the vastly under-insured state of corporate receivables in Canada.”

It is the lack of receivables insurance that introduces undue risk on working capital loans, says Hébert, inhibits the amount that can be loaned, forcing higher interest rates on business clients and artificially restricts sales growth.

For North, the 2008 recession is a unique animal among recessions.

“I want to compare out recession to other recessions. In the 1980 recession, we lost about 1 million jobs, but gained them all back in something like 12 months,” says North. “In the 1974 recession, we lost 3 million jobs, and got them all back in 18 to 20 months. In our recession, we lost 9 million jobs, and it’s taken us six years – just a couple of months ago – to get back to the break-even point.”

The other panelist – David Watt, Chief Economist at HSBC Bank Canada, sees a real risk of relying on consumer spending to support GDP growth.

To see video of the presentations from Friday's breakfast discussion, click here.

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“In a healthy recovery, the employment rate tends to rise. That is, employment growth will outpace population growth,” says Watt. “That was the case as Canada emerged from recession in mid-2009 up until late 2012. Since then, the employment has fallen back to its financial crisis low. This points to lacklustre job creation and an economy that still faces notable headwinds.”

For North – again comparing the current recession numbers to other recessions – the recovery is falling far behind on job creation.

“After 76 months (from the 2008 recession), here is where we should be,” he says. “In the 2001 recession after 76 months, we had 5 million more jobs. In the ’74 recession after 76 months, we had more than 10 million more jobs. We should have five to 10 million more jobs than we do right now. No wonder the economy is so slow. No wonder people feel the recession is not over.”

Peter Hall, chief economist at Export Development Canada, says that the 2001 crash wasn’t typical of other recessions, describing it more as a ‘tech crash’ and localized.

“You can make an argument that we’ve had an expansion of the economy from the 1990s until the crash in 2008,” says Hall. “If you have a super cycle – like the one I just mentioned – then you have an enormous period of excess, and why we’ve had the five years of recession. And there are numbers to substantiate that.”

The long recession is indicative of the “extraordinary period of excess,” says Hall, adding that the giant government stimulus package immediately following the 2008 crash contributed to that excess. “You can expect to have a long period of down, in the context of that.” (continued.)
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For Watt, the current situation is indicative that “something in Canada is not working right,” pointing to borrowing trends among Canadian households that are accelerating, and five years that economists have been over-optimistic about global growth.

“We’ve done much better than other G7 nations,” says Watt. “That doesn’t mean we’re doing well right now.”

What will drive growth is investment – and that is where the insurance investment community can play a role.

The U.S. is not going to have the same pull as it once did on the Canadian economy, says Watt.

“What could fill some of the growth gap – and we’ve been waiting for this for five years like everything else – is business investment in Canada,” he says. “We need to drive the economy in the short term, and in the long term. We need to accelerate business investment. We don’t need Canadian businesses to be cautious, to be definitively sure that things are getting better in the global economy.

“With the trade barriers going down, the competitive pressures will be increasing dramatically in the next few years. Canadian businesses have to up their game, and increase business investment. That’s the long-term perspective,” says Watt. “In the short term, we need businesses to realize they have rarely been in better financial shape – cash balances are high, debt-equity ratios are extremely low. The corporate sector is in extremely good financial shape.”

Watt added his voice to the other panelists, that the consumer cannot be expected to help the country spend its way out of the recession.

“Households cannot continue to carry debt,” he says. “We need this reality: households borrowing less; businesses borrowing more. We have to get governments to tap the economy on the shoulder and give this message. They’ve already done it on household debt four times.”

And it is a message that carries a dire warning if not heeded.

“If it continues the way it is, it’s not going to end well,” says Watt.
 

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