December   
2009

Vol 9 - No. 6


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ECONOMY


 

The Race to Recovery

Peter G. Hall
EDC Vice-President and Chief Economist

Once 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.

This 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.

The views expressed here are those of the author, and not necessarily of Export Development Canada.

©2009 EDC

 

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