Friday, 29 January 2010

McKinsey deflates another bubble

Those who think that now that the recession is over, everything is fine and happy days are here again might think a second thought after reading strategic consulting company McKinsey's The Looming Deleveraging Challenge (free registration required for access to the report). We Canadians might be especially over-confident given the minimal harm our banks suffered during the 2008 crisis.

Despite having the lowest total of public and private debt amongst the 14 countries studied, Canada still likely faces deleveraging in the household sector according to McKinsey. The BRIC (Brazil, Russia, India, China) countries are all much less constrained by debt. The USA, Spain and the UK are more likely to have deleveraging in more sectors than Canada.

McKinsey says deleveraging countries face prolonged belt tightening and lower economic growth for two to three years. Given Canada's strong economic ties to the USA and their even worse state, I'd guess we are in that boat. Ssssssss is the sound of the slow leak in the hope bubble.

The good news is that GDP growth, based on past examples McKinsey studied, likely resumes strongly after that. It will again be time to take a deep breath and start inflating a new bubble.

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