By Peter G. Hall, Vice President and Chief Economist
The audience gasps. Way up in the vaulted canopy, the high-wire act falters. They’ve seen this all before, many times. At first, they couldn’t look – the odds of failure seemed too great. But time and again, the foothold was regained, and the act resumed. Now, it looks like that master wire-walker is actually going to make it, and breathless, the throng is willing that lone figure to succeed. Will the world economy’s high-wire act really end well?
It has taken skill, hard work and a bit of luck to get this far. The economy has outlived impossible fiscal chasms, financial market carnage, waves of political upheaval, experimental policy actions and a host of smaller but significant inhibitors. Neo-stagnation is the current wobble in the wire. Europe’s brush with “triple-dip”, Japan’s new-tax trauma, developing-market doldrums and weather are the most recent worries. Can we overcome the latest disturbances, or is fatigue threatening our final few steps?
Thankfully, there is a source of stability, and it just happens to be Canada’s biggest customer. The American economy is going full-tilt, and thankfully, its success is catching on. It’s secret? An essential ingredient called pent-up demand. Gone are the pre-crisis excesses; they’ve been replaced by a sizable and growing list of unmet needs that are fueling an upsurge of activity. It’s obvious in housing: new residential construction can still easily grow by 40 per cent and only just be meeting current market needs. It’s also obvious in consumption. Consumers are well behind on purchasing, but they’re catching up. Renewed confidence, significant employment gains, real wage increases, and substantial deleveraging have re-ignited spending. This is huge: U.S. consumers don’t just account for 70 per cent of their economy, but also 13 cents of every dollar that circulates worldwide. This isn’t just a U.S. thing; it’s global. But there’s more yet. U.S. industry is up against huge capacity constraints. They are way behind on investment in new capacity, and will have to ramp up their spending just to keep pace with orders. With this in mind, EDC’s Spring 2015 Global Export forecast is calling for U.S. growth of 3.6 per cent this year and 3.3 per cent in 2016.
So, is the growth just contained to America? Far from it. There is already evidence that current momentum is spilling over to Europe. Germany’s growth is ramping up, as are business and consumer confidence. The weaker euro is helping the Continent to capture more U.S. activity. Lower oil prices aren’t hurting; the EU is the largest net importer of petroleum on the planet, and lower prices are a very well-timed, significant chunk of stimulus. Eurozone growth is forecast to hit 1.4 this year and 1.6 in 2016.
Key emerging markets will also get pulled along. Revival of U.S. and European growth will reignite Chinese export growth, and by extension, activity in the broader regional theatre. Elsewhere in the emerging world, things will be mixed. Commodity-dependent economies and those falling behind in economic reforms will lag the rest. Reform-minded economies like Mexico and Colombia will fare better. Altogether, emerging market growth is forecast to hit 4.3 per cent this year and to post a decent 4.9 per cent gain in 2016. Add it all up, and we have the global economy moving forward in 2015 by 3.5 per cent, and 3.9 per cent next year.
Canadian exports will benefit, but the performance will be mixed. Plunging oil prices are wreaking havoc with the oil and gas sector. Other commodity exports will generally be soft. But the much weaker Canadian dollar is a boon to non-energy manufacturing, lifting activity in the auto, aerospace and machinery and equipment sectors, among others. Put it all together, and Canadian exports are forecast to rise by a slim 1 per cent this year and by an additional 7 per cent in 2016.
The bottom line? The global economy has very skillfully traversed its largest chasm in recent memory. It has been a death-defying high-wire act, with safety nets that long since became very frayed. The wire-walker is perhaps weary, but has gained courage from the success of past efforts and success in overcoming obstacles. While still vulnerable to disturbances, the economy’s proximity to the ‘other side’ is building confidence that we are making it. Our challenge? To ensure that we shift along with the balance of growth, capturing as much of it as we can.
This commentary 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.