Race to Recovery
and Chief Economist
again, the ‘R’ word is everywhere – although this time, it’s not
recession, but recovery. Positive signals in the economy are mounting,
setting off lots of ‘recovery buzz’. Trouble is, the growth that we
are seeing still leaves us well below pre-recession activity levels.
Clearly there is a big difference between the return of growth and the
onset of true recovery. The race to recovery is on, but we still have
big hurdles to clear before we’ll have a solid fix on the finish line.
race has now been underway for awhile, and key hurdles have already been
cleared. Financial markets staved off crisis last fall, as massive and rapid
injections of liquidity kept funds flowing in the wake of the toxic asset
problem. Large financial institutions have returned to profitability, and
credit spreads have stabilized at much more normal levels. The world economy
has also survived a drop in total production and trade far larger than any in
recent memory. And the current optimism about the near-term future is
occurring as unemployment rates around the world continue to march upward.
All of these are significant hurdles, but we are not through yet. Rising
unemployment around the world is resulting in greater credit defaults, which
will be the second big test that financial institutions face. Those defaults
are likely to crest in the final months of this year and into the first
quarter of next.
A second hurdle is the threat of inflation. Price indexes are bound to jump in
the coming months as the effect of last year’s crash in energy and metals
prices wears off. This could trigger unwarranted concern, itself leading to an
untimely unwinding of stimulus, which would ultimately delay recovery.
The threat of protectionism is a third, and potentially debilitating, hurdle.
Sadly, protectionist trade actions seem to be gaining momentum, and imperil
not just immediate, but longer-term trade performance. As the resumption of
trade is critical to a sustained global recovery, the stakes are high.
However, reason is expected to prevail, snuffing out the harmful rhetoric as
recovery hopes rise.
Canada faces a unique hurdle: the currency. Our dollar has soared in recent
days, well beyond the level suggested by current global conditions. Those
conditions should lead the loonie lower, but the factors that are pushing it
upward could persist, posing a key threat to near-term export performance.
Finally, the excesses that built up during the boom years are still being
worked off. That process is expected to take us into mid-2010, putting
recovery on hold until later next year. EDC Economics’ Autumn 2009 Global
Export Forecast calls for the world economy to shrink by 1.3% this year, and
to rise by 2.9% in 2010 – growth, yes, but well shy of typical
recovery-style growth. Likewise, Canada is forecast to contract by 2.3% this
year, led by a staggering drop in exports, followed by a 1.9% gain in 2010.
Most industries will see exports return to growth next year, but to levels
that are still well below what was seen in the boom years. Exports of primary
goods will generally see above-average growth, while shipments of non-auto
machinery and equipment lag behind other industries.
The bottom line? The race to recovery is much the same as in previous economic
downturns, with one key difference: it is longer. The remaining hurdles will
test endurance, but bring racers in sight of the finish line, when strong
growth returns in earnest – something we can all look forward to in 2011.
views expressed here are those of the author, and not necessarily of Export