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Second-Half
Softening Tests World Economy
BY
PETER G. HALL 
EDC Vice-President
and Chief Economist
The
pressure is rising. Slower growth is etched all over current data,
dampening the bullish mood that dominated the airwaves in the first
quarter. Markets are in yet another turbulent phase as we move into the
post-stimulus phase of the rebound – perhaps the trickiest period in
the past two years.
World growth figures for 2010 are much stronger than initial forecasts
expected. Economic heavy-hitters cranked out impressive rebound-style
growth in the fourth quarter of 2009 and the first quarter of this year.
Forecasts were revised upward, and a growing chorus of analysts hailed
the arrival of the long-sought recovery. Stock markets were pleased, and
embarked on a spirited 3-month rally.
That all changed in late April, as concern about the Southern European
fiscal picture erupted, re-igniting worries about the state of European
financial institutions. Weakening economic data have since added to the
angst. There is growing agreement that a broadly-based second-half
softening is inevitable, and a palpable uneasiness about how the world
will react. Canada will not likely buck the trend; a combination of
international and domestic factors suggests slower second-half
performance.
The timing is unnerving. Hopes were high that the worldwide outpouring
of fiscal and monetary stimulus would bridge the economy to a
sustainable recovery. But the impact of the stimulus is waning, and
certain key sectors of the economy have yet to see a rebound. This
suggests that the recovery in the world economy’s true core has yet to
occur, and that what we are now entering is a mid-rebound softening that
should be temporary, but will test our collective nerves for a few
months.
Our Summer 2010 Global Export Forecast calls for world growth this year
to reach 4%, a pace that is welcome relief from the 0.6% contraction
last year. However, this is due mostly to aggressive growth that is now
behind us, and in fact is still quite weak compared with past recovery
periods. The latter-2010 softening will also show up in next year’s
numbers, keeping growth for 2011 at 4.1%.
Dimmer global growth prospects are expected to lower commodity prices
further in the second half of the year, weighing the loonie down to the
US $0.92 level. The weaker currency will give Canadian exporters some
relief, but softening demand conditions at home and abroad will restrain
growth for the remainder of this year. Canada is forecast to see growth
hit 3% this year before it eases to 2.5% in 2011. Export growth will
follow this pattern, slowing from 11% this year to 6% in 2011.
Will we keep our nerve over the slow months? As long as there are no
shocks, we should be alright, but given the experience of the past few
weeks, that is far from guaranteed. Weaker sovereign states may cause
ripples as they go to market to roll over large blocks of maturing debt.
Sub-par growth in key emerging markets would likely rattle markets.
Negative news from financial institutions could also be disruptive. And
any adverse shock, if persistent, could resurrect the worrisome
protectionist reactions that surfaced with the onset of recession.
Staying the course will require much effort.
The bottom line? Growth is softening, and initially, markets aren’t
taking the news well. But there are good reasons for the slowing, and
good reasons to believe it will be temporary. Simply put, today’s
weakness is working down yesterday’s excesses, and setting us up for a
return to growth tomorrow.
The
views expressed here are those of the author, and not necessarily of
Export Development Canada.
©2009
EDC
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