By R. Bruce Striegler
Earlier this spring, Export Development Canada (EDC) released a global export forecast that predicts industrial capacity constraints within the U.S. will be a key driver of global economic growth over the next two years. “Surging U.S. demand has gobbled up the spare capacity in its industrial machine,” said Peter Hall, Chief Economist, EDC. “Producers are cash-rich, and are looking for new places to invest their surplus capital.”
A higher U.S. dollar (up by more than 12 per cent on a trade-weighted basis since mid-2014) is also increasing the attractiveness of foreign investments and imports. Together, these forces are creating a huge opportunity for Canadian companies to meet the U.S. economy’s need for goods, services, and production capacity. “Things are tight stateside, and if businesses can’t add capacity in the U.S., they’ll look to their neighbours for help,” said Hall. “If ever there was a time for businesses, whether small, medium or large, to start exporting to the U.S., it’s now.” Hall says that U.S. consumers are again confident, employment is up and wages are rising as debt ratios sink. “We’re seeing facilities in the U.S. being pushed to capacity as they scramble to keep up with increasing demand,” added Hall. EDC’s forecast for the U.S. economy is 3.6 per cent growth in 2015 and 3.3 per cent in 2016.
The value of Canadian exports to the U.S. is expected to decline by one per cent in 2015 due largely to the drop in energy prices. However, other sectors will see strong growth with industrial machinery exports topping the charts at 17 per cent. “While it’s a key growth driver, the U.S. economy isn’t the only game in town,” said Hall. “Spill-over growth will reach Europe, the rest of the developed world and emerging markets.”
Assessing the global risks and tackling at pent-up demand
In a web presentation to exporters, Hall says, “It’s messy out there.” He says there’s a litany of global economic risk, in some cases started by the 2008 world financial crisis but some developed since the recovery began in 2013. “There are problems with the financial structure of the world, fiscal risks such as the Greek situation and the volatility of commodities. There are geo-political situations around the world and numerous economies have been dealing with weakening.” But Hall also says that EDC doesn’t see the economic world stumbling from risk to risk. “There are great signs that the U.S. economy is gaining, not losing. This growth is starting to spread to the rest of the world.” He tells the web audience that it seems America is going full-tilt, presenting an essential ingredient for sustained growth.
“Pent-up demand is something like an anti-surplus,” he explains. Economists use the term to describe the public’s strong return to consumerism following a period of decreased spending. Mr. Hall says there is evidence of this in the U.S. housing market, a leading indicator of economic activity. “The housing market pulls everything else up in its slipstream, and this is good not only for the U.S. economy, but it is good for the world market.” Hall suggests growth of up to 40 per cent in the American housing market over the next year or so would just meet the needs of the current market, but adds that more growth is required to deal decisively with the deficit.
U.S. under-capacity will grow business elsewhere
Noting that American consumers account for almost 70 per cent of the U.S. economy, Mr. Hall says that their absence over the last seven years has had an impact on the broader economy and their return is being felt not only in the U.S, economy, but around the world. “American consumers account for 13 cents of every dollar that circulates worldwide, this revival is for everyone.” EDC’s spring 2015 Global Export Forecast says there is even more excitement in the business investment arena, and American businesses are now waking to a different crisis. The report says that the fast ramp-up of activity has consumed existing resources very quickly and there is now a wide-spread capacity crunch. With capital spending vaulting into the double-digits and the pace of new orders, more capacity will be needed in the near term. In fact, there’s a worry that the ability to create new capacity is also tight, suggesting a risk that orders may not be met. Add it all up, EDC says, and the expectation is of U.S. GDP growth of 3.6 per cent this year, and 3.3 per cent in 2016.
“We’ve had a huge build-up of excess capacity in the world market, probably five years’ worth, so when the recession happened,” Hall says, “There was far more spare capacity than imaginable.” According to Hall, U.S. businesses have been using that spare capacity, and have been lulled into the sense of not needing to invest more. “Under-investment becomes normal until you hit a critical point, and that’s the point they’ve hit now; they’ve run out of capacity.” Mr. Hall points to a recent U.S. Purchasing Managers Index showing orders are picking up and the softness from weather effects earlier this year are washing away. “It is heating up at a moment in time when the U.S. doesn’t have the capacity to process these contracts, and they’re going to have to say ‘good-bye’ to certain business or get really creative by investing in a hurry, by importing goods from elsewhere or creating capacity in another country that has that capacity.”
“They’re already increasing construction at a double-digit pace. This is a great problem to have.” He advises they’ll be forced to go elsewhere to service the demand. Economists have been worried about lack of demand, but ironically now, it’s lack of supply that has them worried, and Hall says, “The dilemma with the world economy at the moment is that this growth hasn’t actually converted from the U.S. elsewhere. That’s been a big question, they appear to be absorbing their domestic capacity, and we’re having to think about the negative impact of “Buy American” and how that has kept business inside U.S. borders.”
Europe looks to growth, China remains flat
It’s paradoxical that the global crisis spurred a retreat to protectionism, including programs such as Buy American or France First, and that some of the greatest beneficiaries of globalization were the first to jump on the protectionism bandwagon. Assuming firms will not turn business away, capacity is now more likely to be sourced from abroad, Hall says. He adds, “There’s no place on the planet that is more price-sensitive than the U.S., so when foreign goods or services are now a 20 per cent better deal than domestic, they’re saying let’s get a better bargain, and that automatically takes this growth into other parts of the world.”
Hall says that the economic signs indicate that things are picking up in Western Europe, “After their lull last year that scared everybody, Europe is gathering momentum.” He explains that Western European GDP is equivalent in size to the U.S. and suggests that if both the U.S. and European economies are showing strength, it is a likely scenario that growth will be transferred to the rest of the world. Hall says, “There will need to be much more evidence before we can conclude that Europe is on a new, higher-growth trajectory, but our expectations, which are much the same as others’, is that growth will accelerate to 1.6 per cent by 2016.”
China grew at its slowest pace in six years at the start of 2015 and weakness in key sectors suggested the world’s second-largest economy was still losing momentum. Soft domestic demand, interspersed with stories of policy-led construction excesses and financial market fragility is the predominant theme, leading many forecasters to write down growth to something just under 7 per cent. Nevertheless, Peter Hall says, “If trade in the rest of the world is coming back, China will be a key beneficiary, as well as the nations that surround it. It doesn’t take much to get back to double-digit export and import growth in China. We think that this is something Canadian exporters should keep their eyes on, since we should be at the leading edge of this likely resurgence.”
Falling oil prices have added complications to the outlook. Hall says that the positive effects on net oil-consuming economies will outweigh the negative effects on the big oil producers, lifting global growth. “The price shakeout is itself related to the return of growth and the unwinding of extraordinary post-crisis monetary measures.” Prices for a range of commodities were artificially high, and are now trying to find a more stable platform. “Until that point, we can expect turbulence.”
Hall foresees a rebound, “While we’ve experienced a deep decline this year, we expect a rally next year; a 23 per cent drop this year turns into a 20 per cent increase next year.” EDC’s team forecasts Canada’s export growth at one per cent for 2015, and 7 per cent in 2016. The outlook for Canadian GDP is 2.4 per cent this year and 2016. EDC’s global export forecast calls for worldwide growth of 3.5 per cent this year, and an additional 3.9 per cent in 2016.