By Peter G. Hall, Vice-President and Chief Economist, EDC
Canada seems to be losing some of its recent gleam. Post-crisis, we received accolades for our financial stability, fiscal prudence, rich resource base and resilient domestic demand. Now, our consumers are fast becoming as indebted as pre-crisis Americans, housing activity is overblown, and commodity prices have softened. Against expectations, exports have remained stubbornly lacklustre. Are we about to be treated to a surge of growth, or will conditions remain tricky?
What’s puzzling is that weakness here is bucking against momentum in the developed world. The OECD leading indicator now boasts an atypical year-long increase. Japan just saw an impressive six-month run of GDP growth that is stoking optimism. The EU has recently broken out of its six-quarter recession. As for the U.S., it picked up first, and is the furthest along the recovery road, although fiscal drag has been masking private-sector success. So much for recent stats – is it sustainable?
Analysts have been wrong about this for five years, but this time, time seems to be onside. For most of that period, it wasn’t realistic to think that five years of global economic excess could be dealt with quickly. But after five lean years, there is considerable evidence of pent-up demand in key markets. The U.S. housing market is an obvious, but not isolated, example of this broader global phenomenon.
But the world doesn’t just have to consume more; now, it wants to. One of the most significant recent developments in the global economy is the return of confidence. Crisis robbed the economy of confidence for an unusually drawn-out period. Confidence is now rising even in Japan and Europe, and in the U.S. it has conclusively burst out of an extremely rare four-and-a-half-year recessionary funk. This could prove to give global commercial activity the biggest lift it has seen since 2007.
Nerves were recently rattled by the U.S. budget impasse. Far less coverage was given to fiscal improvements, both there and in Europe. These are giving governments needed leeway to proceed with current fiscal plans – which will be much less of a drag on world growth in 2014. This end of tightening will bring a growth dividend that is sure to add inspiration to reviving confidence. Monetary policy is likely to do the same. If signs of growth weren’t obvious, talk of unwinding extraordinary monetary measures – part of the growing chorus of ‘growth-chatter’ – would be almost non-existent.
What does it look like in numbers? Global growth is projected to increase to 3.9 per cent in 2014, a solid step toward a sustained new growth cycle following two years of 3.2 per cent growth. For the first time in a long while, industrialized markets are forecast to contribute more to world GDP growth than the emerging world. Led by the U.S., industrialized markets will almost double this year’s growth in 2014, notching up an increase of 2.3 per cent.
Canada’s overall numbers are not as impressive, but they reflect the growth rotation that will see exports and business investment grab the baton from the consumer and housing sectors. Conditions already favour export growth: a weakening loonie, a surge in leading sectors, a key export market that is leading the way, and strong demand for resources. As such, Canada’s exports will rise 5.3 per cent in 2014 after seeing a 4.4 per cent increase this year. Leading sectors include forestry, aerospace and machinery. Autos, fertilizers and the advanced technology sector will not fare as well.
The bottom line? A new economic cycle is in the works. We can expect a few wobbles as governments remove the training wheels, but like all new cycles, we’ll likely get used to a more balanced ride sooner than expected. Canadian exporters are well placed to capitalize on this, and given low domestic growth prospects, the timing couldn’t be better.
This commentary is reprinted with permission from EDC. It is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. Neither EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.