Transcript: Why recession is unlikely in 2020

Runtime: 3:25

Benjamin Tal
Deputy Chief Economist, CIBC World Markets

[Soft Music playing in background]

[Title Reads: Why Recession is unlikely in 2020]

[Text reads: Benjamin Tal, Deputy Chief Economist, CIBC World Markets]

Yes, this expansion, as we all know, is the longest expansion ever. And clearly the question is to what extent the recession is coming? The yield curve, the difference between long-term and short-term interest rates is telling us, yes, the recession is coming.

[Text reads: Yield curve is signaling a recession is coming]

We look at manufacturing activity—negative, for two months.

[Text reads: Recent negative manufacturing data also shows a looming recession]

Clearly, recession is coming as far as the market is concerned. The market is getting nervous. So we're getting all kinds of signals. However, we have to remember, every economic recession was helped, if not caused, by a monetary policy error, in which central bankers raise interest rates way too quickly and kill the economy, and they waited for too long to cut interest rates.

[Text reads: Previous recessions caused by monetary policy errors of hiking rates too quickly]

So the key question is, to what extent central bankers—now the Bank of Canada and the Fed—are repeating past mistakes?

[Text reads: Key question is to what extent are Central Bankers now repeating past mistakes?]

My answer is “no.” I think that what we are seeing now is a mid-cycle easing.

[Text reads: We may be seeing mid-cycle easing of interest rates]

What we have seen in 1995 and in 1998, when the Fed started to cut interest rates relatively early to prevent a recession from coming. In 1995 and in 1998, we had an inverted yield curve and there was no recession. Why? Because of this mid-cycle easing.

[Music playing]

[Title Reads: When will a recession hit?]

The cycle is not dead. There will be a recession. The question is “when”?

[Timelapse of a busy shopping mall]

The potential growth of the economy,

[A woman searches through a rack of clothing]

the speed limit of the economy,

[A man enters the numbers from his credit card into a smartphone]

is much lower than it used to be. If, in the past, potential growth was, let's say, 3, 3.5%, now it's about 1.5%. So we are flying very, very low. And when you fly very low, one accident can take you to negative growth and the market will react in a negative way.

[Text reads: Weaker economic growth can easily move into negative growth]

The economy is in a recession? No, we simply are starting from a low base and that an accident will take you to a negative territory, and then you go back. That's exactly what we've seen in the fourth quarter of last year, and the first quarter of this year, where the Canadian economy was basically at zero percent because our potential growth is relatively low.

[Music playing]

[Title Reads: Where should investors turn?]

Yes, I think that to the extent that the market is panicking regarding a recession— for example, the manufacturing numbers we have seen over the past few months were negative in the US—the market is panicking. We are seeing investors selling off. I suggest getting into the market in this environment because I see three things helping.

[A wide shot of the US Federal Reserve]

One is the Fed cutting—timely.

[A vast number of sheets of US $100 bills roll move across the screen, followed by a close-up of a single $100 bill]

Second is that the government in the US will be spending money that they don't have, but that will lift the economy in 2020.

[Aerial shot of a busy shipping yard]

And I think because of political reasons, there will be an agreement between China and the US regarding trade in the last minute, just in time for the 2020 elections, that will lift the market.

[Text reads: We may see a China/U.S. trade deal struck at the last minute]

So I believe those three forces will prevent a recession from coming.

[Text reads: The 3 forces of the U.S. Fed, U.S. Gov’t spending and potential trade deal may avert a recession ]

2020 will not be a strong year, but those forces will lift it above a recessionary territory, something that the market will welcome.

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