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Waiting out the recession

By Andrew Mitchell Although most economists generally wait for the U.S. Federal Reserve to officially admit a state of recession, several leading authorities on the economy say a downturn is inevitable if it’s not already here.

By Andrew Mitchell

Although most economists generally wait for the U.S. Federal Reserve to officially admit a state of recession, several leading authorities on the economy say a downturn is inevitable if it’s not already here. Some are even predicting an economic depression, the likes of which we haven’t experienced in more than 70 years. The word “collapse” has been used, and by experts who know a lot more than I do.

The Bank of Canada is not as pessimistic but is predicting a slightly slower economy for the near future. As long as the demand for oil remains steady, and the market for natural resources is strong, we should be able to tread water in most scenarios.

But any ripple in the U.S., our biggest trading partner, will naturally create waves in Canada and especially in the tourism industry which relies on people having enough discretionary income to spend on luxuries like ski vacations.

Recessions are typically short-lived, usually comprising around nine months or so of stagnant activity before the whole puppet show gets going again.

We do occasionally get recessions that are accompanied by a mini economic crisis of some kind — like the Black Monday stock market collapse of 1989 that left half the parents in my middle-class suburb permanently downsized, my own father included. But for the most part a recession just means that economic growth slows or stalls and consumer spending dries up.

For the majority of people that keep their jobs, there are benefits. Prices come down for many goods and services, while central banks lower their interest rates to encourage consumers to buy and borrow our way out of the recession.

The last recognized recession was in 2000, the result of the bursting dot-com bubble, Enron, WorldCom and other financial scandals. That downturn lasted longer than many expected as a result of the Sept. 11 terror attacks, which impacted everything from airlines to the price of oil.

Unemployment was an issue across Canada for a short while, but low interest rates made it a great time to buy a new house or a car.

Whistler took years longer than everyone else to recover from that recession, as we also experienced our worst snow season on record in 2004-2005. Add in the rising cost of gas, new passport requirements, and a rising Canadian dollar, and things were looking grim — some local businesses even closed up shop, while others were right on the edge.

Things have been turning around since then, with the resort breaking two million skier visits again last winter and posting back-to-back record summers in 2006 and 2007. Bookings were well up over the holidays this year, and things look pretty solid for the remainder of the season.

There’s optimism in the community that I haven’t seen in a while, and most people expect the ball to keep rolling right through the 2010 Games. For this I have to applaud the general caution of Whistler-Blackcomb, Tourism Whistler and the resort in general in keeping prices within reach for most travelers. That strategy got us through the last recession, and it’s the key to surviving whatever happens next in the global economy. It has taken us years to shed our once-deserved reputation for being too expensive, and the last thing we want to do is revive that notion.

Whatever the Bank of Canada might be predicting, there’s no denying that things are looking grim south of the border. All the recent turmoil in the stock markets and real estate markets can be pegged to a specific weakness in the U.S. economy, which is the reliance on debt to fuel growth.

As a few economists have pointed out, real growth and wages in the U.S. economy haven’t kept up with inflation for the past decade or so. The stock market wasn’t doing much better on average, so banks and funds looked for new places to invest their cash on behalf of their clients. After weighing options, they bet heavily on the debt market, where you’re guaranteed a slow but reasonable rate of return as long as debtors continue to pay their bills on time.

Here’s the problem. Through the last recession the U.S. Federal Reserve Bank responded by lowering interest rates and putting more cash into circulation. Regulations were relaxed to allow more competition in the lending market, on the principle that the consumer could benefit.

Through lenders the banks encouraged people to take out loans, buy houses, finance cars and generally live beyond their means. People bought overvalued houses at artificially low interest rates they could barely afford, not realizing that the rates would one day go up and that their houses could go down in value.

The easy access to cash and artificially low interest rates kept people blinded to the economic reality — a growing dependence on increasingly expensive foreign oil, and a growing trade imbalance fueled by the purchase of lower priced imported goods that made it appear that the cost of living was improving for most people. The reality is also stagnant wages for the middle class, growing household and credit card debt, rising health insurance costs, and smaller returns for the people who do manage to save and invest their money.

Americans are waking up to the new reality as the housing bubble bursts, the sub prime mortgage market melts down, the stock market fluctuates, and their dollar drops in relation to other currencies.

In a normal recession we can generally tighten our belts for a month or a year and wait it out, but a recession combined with a collapsing debt market is trouble. Ordinarily you get out of a recession by encouraging more borrowing, spending and investing, but that’s not an option this time around now that the banks are shy about loaning money or extending credit.

Surviving the economic downturn some experts are predicting will require a return to sound economic principles, enhanced regulations for banking, mortgage and debt markets to restore investor and consumer confidence, spending cuts by governments and individuals, revisions to international trade agreements to restore the trade imbalance, and possibly some sort of New Deal program by governments on a scale we haven’t seen since the 30s. Most likely it’s going to be an investment in technology and clean energy, but initiatives like B.C.’s recent $14 billion investment in transit will also help.

Whistler may suffer a little if some of our key travel markets suffer a prolonged recession, but I’d argue that our recent experiences and value strategy have put us in a better position to weather any storm.

All the more reason for us to be cautious heading into the 2010 Games — the temptation to cash in for a few short weeks could undo years of hard work.