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Surprise of the Year: Hope Restored ... Hopefully

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By Peter G Hall *
Vice-President and Chief Economist Export Development Canada

Following four years filled with surprises, it’s hard to imagine anything really causing our hearts to jump in 2013. Face it, as with roller coasters, most of the economy’s post-crisis surprises have been on the downside. And like hardened adolescents who have experienced everything the most extreme theme parks could offer, most of us probably entered 2013 with a ’try me’ attitude. So, did anything surprise us? Was this year’s surprise that we failed to be surprised by what surprised us in the past?

Perhaps. But then, there were the wars that didn’t happen. Syria came close to feeling the sting of international disapproval, and that was averted by a seemingly offhand comment. Some expected bombs to fall in Iran, but again, diplomacy prevailed. How about the sea-change in Chinese policy? A wide spate of reforms and significant deregulation was announced in November, following the revelation that authorities seem content with 7.5 per cent growth. Funny how blasé we can be about such events, though – they came and went, and don’t seem to have had much impact...yet.

Maybe that’s what protracted, excessive gloom does to us – big things can happen, and they just don’t seem to land with the same impact. Pessimism is a hallmark of the post-crisis period, and it was with us for so long, we almost didn’t notice. Confidence – its polar opposite – is one of those necessities that, like water, air, daily food, peace – seem to operate in the background, taken for granted. That is, until they are taken away. Without confidence, at best we cower in the shadows, coming out to carry on basic activities, and scurrying back for shelter. At worst, it causes the collapse of financial systems and the distribution of goods and services – in a word, chaos.

The collapse of confidence prolonged the Great Depression. Failure of the economy to reset its psychology birthed deficit financing as a means to reboot activity. It worked, although the experience of that period left a generation jaded for life, and marked future generations as well.

Neo-gloom was potentially more devastating. We used up our fiscal remedies early in the downturn, robbing us of the post-Depression period’s most potent weapon, leaving us with untested exotic monetary measures. One might easily have mused whether confidence might ever return. And yet, all on its own, in June of this year, US consumer confidence, buried at recessionary levels since mid-2009, burst back into the normal zone with little support other than a terse statement indicating that the end of extraordinary stimulus was near. Confidence returned, and amazingly, all on its own.

The US wasn’t alone. Confidence among Euro-area businesses and consumers is in its longest post-fiscal-stimulus upsurge, undoubtedly fuelled by the end of the protracted recession. Japan is also in the mix. The influential Tankan business survey this week matched the previous peak in 2007, following four quarters of impressive gains. The cloud of gloom is not just lifting in North America, but everywhere –also affecting media coverage, which seems to have taken on a brighter tone lately.

It’s sad how such a consequential shift can be misread. As powerful a force as sentiment can be in restoring the economy to growth, politicians stateside seemed to misread it completely. Tripping up over sequestration in March and government shutdown in October could well have spoiled the renaissance in sentiment. Americans took it hard, and we can only hope that the effects prove temporary. If so, hopes have indeed been restored, adding great promise to the 2014 outlook.

The bottom line? How fitting to dwell on hope at this time of the year. It matters more than we give it credit for.


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