By R. Bruce Striegler
Balance returning to world’s economy?
Following his annual spring tour of eighteen Canadian cities where he discussed global economic affairs as they relate to Canadian business, Peter G. Hall, Vice-‐President and Chief Economist of Export Development Canada (EDC) presented a recent webcast titled “Let’s talk exports”. Using the analogy of a race car, Mr. Hall says, “Anyone who is involved in international trade knows this is a very fast-‐paced race. Everyone is filled with adrenalin. You never stop thinking about every square inch of the track you’re playing on. You know you have intense competition. The turns are sharp, the speeds are high. All of this is the way international trade is played out. It’s a high risk game.”
He says the memories of the crash of 2008 linger with exporters and investors, with everyone remaining a little hesitant and pessimistic. “Americans for example, who like to see the glass half full, are ready to re-‐join the game but even they remain very dour about the world economy of the last four and a half years.” He suggests that pessimism very much characterizes the race at this point in time. “Negative news stories sell much more quickly than good news and pessimism spreads. As well, there is a tendency that negativity becomes self-‐fulfilling.”
Mr. Hall says, however, there are indications that despite what people are saying in response to surveys, various other economic drivers are showing something different going on, that optimism is rising. “Bond rates have gotten lower over the last little while. People would not be willing to take on those bonds if they perceived that risks in the marketplace were actually rising, that policies weren’t actually working.” He says that the reactions to the various panic points the world has experienced have included a number of possible national defaults resulting in enormous and persistent bond spikes lasting for a long time.
“Now, we are seeing as much negative rhetoric around more recent geopolitical events such as the collapse of the Italian election, the crisis in Cyprus, but we don’t see bond spikes as great and they don’t persist as long. This is a second indication that we’re actually feeling better about things, that we’re becoming more comfortable with the policy direction we’re seeing.” He goes on to say that the third point is bank lending. “Surveys of senior loan officers across the developed world show that lending is becoming more relaxed, even in stretched economies. Banks are not the most risk-‐loving institutions and they are not willing to put their money on the table unless there’s going to be a return there. This is another sign of rising confidence.”
Hall suggests that there is a restoration of balance in the economy. “We had a sixteen year growth cycle and at the end of that cycle we’d built up mountainous excesses which we’ve worked our way through over the past four and a half years, and now we are seeing a lot more balance between the period of excess and the low levels of economic activity that has persisted since the crisis. Now, we’re actually seeing tangible signs that balance is being restored. Momentum is a great place for the world economy to be.”
EDC Economics tracks various data sets including the U.S, housing market and Hall points out that last year’s forecast was an idea, whereas this year it’s anchored in real data. “This is a very pivotal market, it’s a leading indicator of economic activity, and in fact now, it’s showing it is in a deficit position, a real turn-‐around to a very troubled market in the U.S.” Housing starts are currently up 40 per cent with 40 to 50 per cent growth embedded in those numbers. Mr. Hall also remarks that U.S. retail sales, after adjusting for inflation, are growing at a four to five per cent pace.
Pinning global hopes on a revived U.S. economy
Hall qualifies his optimism saying that consumer confidence has tried three times to break free of recessionary pessimism but now signs of increased bank lending offer a more promising scenario. He says that consumers and businesses won’t remain gloomy for much longer, baring unforeseen shocks. The momentum has extended to the job market and full-‐time job gains have been sustained through a multi-‐month run. This factor is supported by the private sector renewal underway and Mr. Hall thinks it will continue. “This is where business actually happens. It is the private sector that drives things, gets the economy back on its feet and gets the job machine going. This is the kind of growth that doesn’t just satisfy the U.S. economy but it transmits to the rest of the world economy as well.”
The surge of private sector U.S. growth is a strong enough signal for EDC to believe that the United States economy will expand by 2.3 per cent this year. “On the surface this may not look impressive, but it takes into account fiscal withdrawal that is bleeding away the equivalent of almost 2 per cent of GDP in 2013. What this says is that the rest of the economy is actually expanding by over 4 per cent and this expansion should feed growth, boosting 2014 growth to 3.3 per cent.” Hall adds that these growth mechanisms are not evident in other OECD nations who are saddled with more consequential structural difficulties. He points to Europe, suggesting that pre-‐recession excesses have not been worked off anywhere near the extent as in the U.S. and that forecasts call for growth only of 0.2 per cent this year. “However, European economies will benefit from the American revival and we anticipate region-‐wide growth of 1.2 per cent in 2014.”
Hall spoke of emerging markets, noting that this was one of the great disappointments of 2012. “These markets were seen by many as the world economy’s new engines, and their deceleration sparked one more wave of gloom in the middle of 2012.” He says that the faltering growth demonstrated public stimulus remains a key energizing factor and its untimely withdrawal weakened overall demand. He also noted that these markets rely on developed economies as their fundamental growth driver. “The BRIC markets (Brazil, Russia, India and China) are not far from driver status, but presently by their own admission do not have deep enough domestic markets to carry the rest of the world along.” He added that with the revival of the U.S. market, these emerging economies are now displaying more positive signals.
Collectively, the growth forecast for emerging markets is 5.5 per cent in 2013, to build to 5.9 per cent next year. China seems the most convincing, turning around last year’s deceleration into 8.2 per cent growth this year, predicted for 8.5 per cent in 2014. India is less certain, moving more slowly to higher growth than was realized in 2012.
Brazil’s disastrous 1.0 per cent looks more like 3.4 per cent growth, and 4.0 per cent in 2014. Russia and Mexico appear to be the stalwarts in the large-‐market club, posting stable and impressive growth in the next two years. All this adds up to a world forecast of 3.6 per cent growth this year and 4.2 per cent in 2014.
Resources will carry the Canadian economy
As gloom has circulated around the world, Mr. Hall says that Canada has been fairly immune to it. “The Canadian experience was that the domestic economy took over when trade fell in 2009 and that took everyone by surprise. That doesn’t usually happen. Exporters were able to shield themselves by shifting a good part of their business from the trade side into the domestic economy. Now, there is a lot of worry because the domestic economy isn’t doing so well. We’ve got consumers who have piled up debt and not looking like a growth source. We’ve got a housing market that appears to be over-‐built. Both federal and many provincial governments are in austerity mode, so we have a domestic economy looking quite weak, causing a lot of concern.”
Hall says that many Canadian businesses are looking to the international trade side and wondering if it will come through for them. “They’re looking with a nervous eye at the moment because it isn’t really clear that trade is going to step into this gap. We had a softening in the middle of last year, not giving us much momentum into this year.” Mr. Hall sees a second source of potential growth in trade-‐related investment. “This is true particularly in the resource side. Over the next ten years, there are some 600 projects worth $650 billion requiring hundreds of thousands of direct and indirect employees. That’s a phenomenal amount of activity even if it’s spread over a ten year period of time. If we realize even a fraction of that, we’re in for growth going forward.”
He says Canada stands to benefit from the global revival, with exports becoming a key driver of the economy, and notes that a softer Canadian dollar and weaker commodity prices will help. His forecast for the Canadian dollar is an average 0.97 cents U.S. this year and 0.96 cents next. “We have an overall trade growth forecast of eight per cent, five per cent for next year.” Mr. Hall points to strong, double-‐digit growth already occurring in the forestry sector. “We’re shipping as much in the way of 2×4’s, oriented strandboard and other kinds of lumber as we can. With the U.S. housing sector going up, forestry is the first place to feel it.”
Emerging markets critical for future Canadian growth
Topping the growth charts among exporting industries Hall says, “The primary sector will be duking it out with high value-‐added products.” He continues saying that the metals sector wins slightly with a projected growth this year of 18 per cent. Other segments which Mr. Hall is enthusiastic about are the double-‐digit growth this year, and he projects next year, in machinery and equipment exports which, fed by surging U.S. investment, mergers and acquisitions should see a 10 per cent shot in the arm. Forestry is powering ahead at a 15 per cent clip, thanks to the U.S. housing boom. Energy exports will manage a double-‐digit gain, while fertilizers and the aerospace sector show very well in the single digits.
Mr. Hall concluded saying, “The message we really want everyone to take away from this is you can get really fired up about the U.S. economy and you can ponder whether you should put all your resources into serving the number one economy in the world, but Canada has been venturing out into other markets in a remarkable way. One of the greatest sources of our future growth is our diversification which is now well-‐entrenched inside the Canadian exporting space.” He says that while exports to traditional customers has been growing at something like 1.2 per cent per year (a “disastrous rate for a trading nation”, he remarks), Canada has actually been growing at a rate of over 10 per cent to emerging markets.
Hall points to the last five years of the previous growth cycle, noting that there was actually 15 per cent growth a year. “You don’t have to be a forecaster to see how transformational that kind of growth is for the Canadian economy. When the world is getting back on its feet again, look forward to good times in the American economy, service your business there, interact with that economy but don’t forget what is going on inside emerging markets because for many, many years to come they will still be vastly outgrowing our traditional customers, and that is as much a part of the Canadian success story for the future as the recovery in the U.S. The growth opportunities are there, and they are broadly based around a world that is actually getting back on its feet again.”