Impact of September 11 Underestimated, But Economic Outlook Strong

Perennial economic soothe sayer, Dr. Michael Graham, who last year predicted that the economic upturn was just around the corner, admitted his call was off, but insists the positive trend is delayed, not denied.
"I was confident of the supercharged U.S. and a cheap and competitive market driven economy. Then came September 11. Everything was stopped in its tracks and, of course, my economic forecasts were way, way too high," he told the several hundred attendees to the 7th Annual Aftermarket Forum in Toronto, Ont., this morning.
"A year ago the theme of the forum was ‘Prospecting for Success’ and my theme was ‘Getting Back on Track.’ I was weighing risk and reward. I was, once again, confident. The sweet spot in the recovering economy was there."
Quoting the Jobber News Magazine report from a year earlier, "and if that correspondent is here, I want to thank them because he captured it perfectly. Now, after 40 years, I’ve become a cagey economist. You notice how I worked in [the economic upturn would occur in] ‘2002 or 2003.’ I just wasn’t sure how much was going to carry over into 2003. Well here we are. I stand here one full, character-building year later.
"The moment of truth is at hand. It is not as though I feel badly about my economic forecast for 2002, it is just that my stock market and investment forecast fell way, way short and turned out to be way off target."
The reason, he said, was the fallout from a succession of corporate and accounting scandals that shattered the confidence in the market.
"Trust went out the window. That made all the difference. I must confess I have never known a disconnect like it, between Main Street, your world, and Wall Street, my world. They became increasingly detached in a way that just defied all logic. The reality is that they belong to each other. They are connected at the hip, but in 2002 it didn’t seem to happen that way. Logic went out the window."
He says that the economy may have suffered "the perfect storm," a confluence of events that combined to create the worst set of downturns in decades.
"A storm of this magnitude couldn’t have just blown up overnight. It can trace the great storm of 2002, right back to the summer of 1982. That is a summer I will also never forget. There was an all-pervasive gloom. That was a real water-torture bear market. All of a sudden, in August of that year the markets began turning and they kept on growing. The up wave was gathering and we were on the way from a DOW at 770 all the way up to 11,750 by the winter of 2000."
Overall the trend meant an annual capital appreciation of 17%, and an economic growth rate of 4% to 5%.
"If population grows at 1% to 2%, the economy cannot grow at 4 to 5%. What happened [in 2001 and 2002] was going to happen anyway. The self-correcting mechanism, which is healthy, has happened, but the pullback has been way more than what it should have been."
In this economic environment, looking forward, Graham once again said that the Canada is uniquely well positioned in the world market.
"Low interest rates and lower taxes add up to a potent combination. Canada’s surging growth from coast to coast is the best in the G8. Next year we are going to be the best as well. We have just got so much going for us. Our economy is changing, though. We are no longer hewers of wood and drawers of water. The IT sector is growing. We are becoming a much more broadly based, value-added economy.
"In fiscal terms, we also lead the world. What has happened in the last year is that every other country has slipped back into deficit. Our debt to GDP ratio is below 50%. The EU requires 60% for membership, so fiscally we are in very fine shape. And we are the bargain basement country of the world.
"That to me just adds up to a very compelling investment opportunity." Now, there are risks, he said, referring to the Iraq situation, possible middle east fall out, oil prices, mounting deficits elsewhere, a potential U.S. dip back into the recession, as well as risks at home: no political leadership, government inertia, Kyoto, the electricity debacle in Ontario.
On the whole, though, Graham continues to be bullish on Canada.
"I just think there is so much to look forward to. When the lights turn green, I believe that’s going to happen in 2003, we should be there."