The financial crisis that plunged the world into the worst recession in decades is showing signs of having righted itself.
A proclamation of the welcome development came at the same time that data showed the Canadian economy took another hard knock in March, with manufacturing sales falling 2.7 per cent, reversing a February pickup.
The cheerier harbinger is a steady reduction in global credit spreads — the gaps between interest rates on low-risk government bonds and higher-yielding corporate and other debt — which suggest that the financial meltdown is on course to being resolved.
“The banking crisis is over,” declared the headline in a note Friday from CIBC World Markets chief economist Avery Shenfeld.
“Nobody now expects there’s another Lehman out there,” Shenfeld wrote, referring to the mid-September collapse of U.S. investment bank Lehman Brothers, which jolted financial markets around the world.
“Nor will banks be pushed into a fire sale of assets that would depress valuations of like assets on other banks’ balance sheets.”
The three-month London Interbank Offered Rate, a benchmark for lending between banks, was down 10 basis points on the week to 0.84 per cent, reducing bank funding costs. Some base rates were the lowest since the U.S. subprime mortgage crisis erupted in the summer of 2007.
Pointing to narrowing credit spreads and improved interbank lending, Shenfeld said a turning point in the U.S. crisis was reached with the Obama administration’s rescue measures.
Bank of Montreal economist Sal Guatieri said he also was encouraged by narrowing credit spreads.
“It means borrowing costs will be coming down for a wide range of borrowers, because a lot of variable-rate mortgages and a lot of personal and business loans are tied to the LIBOR rates,” he said.
Guatieri cautioned that weakness remains in the economy and he is not ready to declare an all-clear until he sees improvement in job creation and housing, particularly in the United States.
While financial markets are improving and some indicators point to growth returning later this year, Holt said the “consensus economist” projection of a smooth recovery into 2010 and beyond is overly optimistic and ignores many warning signs.
What could happen instead of orderly progress, he said, is a short-lived burst at the end of this year or early next year simply because the economy has been on the ground for so long.
“The danger is that it’ll be a fleeting wonder,” he warned. “You get such a large pop that it poses the risk of being misinterpreted, so we get pre-emptive tightening by policymakers and what lies on the other side of that is another set of downside risks.”
In a detailed analysis, Scotia Capital outlined six future risks to the economy — exhausted government stimulus, a new Chinese banking crisis, a commercial real-estate collapse, interest rate hikes from central banks, further housing troubles, and a stronger Canadian dollar that smothers any manufacturing recovery.