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Looking
Forward to Better Times
BY
PETER G. HALL 
EDC Vice-President
and Chief Economist
It
was hard to be positive about short-term economic prospects at this time
last year. Our New Year’s message could hardly have been more doleful,
and as it happened, the message was warranted. Global activity levels
are now much lower than they were in late 2008, and a true world
recovery remains elusive. Are we in for more of the same this year, or
can we look forward to better times?
On
a number of fronts, things are looking up. First, economic activity fell so
dramatically that, broadly speaking, sales and production are well below
longer-term sustainable levels. This is creating lots of room for the excesses
of the boom years to be worked off – a process that is likely to take us
until about mid-year. But once the market is back in balance, demand will
boost production and sales back toward sustainable levels, and based on
current activity, that implies a lot of growth. It won’t all happen at once,
but momentum is expected to intensify toward the end of 2010. Best to prepare
now.
Second, the unemployment rate has hit a plateau. Concern mounted in mid-2009
as unemployment soared rapidly, and many expected this to continue into the
first few months of this year. Not so; it appears that business response to
the recession was more immediate than usual, and as such, employment is not
lagging the cycle to the same degree. Time will tell, but it is possible that
hiring will resume more quickly than usual when the economy starts to grow
again. And there are few things that restore confidence and spending activity
like renewed growth in employment.
A third factor is consumer deleveraging. It’s underway now, and it dragging
a lot of cash away from the till. Increased prudence is likely to remain a
more or less permanent legacy of this recession, but the drag on the overall
economy is expected to ease considerably by mid-year. At that time, Western
consumers are expected to have ramped up to a new rate of saving from current
income that they are content with – at which point, spending growth will
rise automatically to roughly match income growth.
These factors will greatly assist the onset of recovery. But they are still in
process, and the intervening time could yet test the mettle of the global
economy. First, financial markets remain vulnerable. High unemployment is
still affecting the credit cycle, which typically lags movements in the
broader economy. Default rates on consumer and business loans are generally
expected to peak in the first half of this year, and if financial institutions
weather this well, recovery won’t be impeded.
A second issue is the timing of fiscal stimulus. Most countries’ spending
packages are well underway, but a key worry is that growth phase of the
collective spending may end before the onset of true global recovery. Timing
is critical, and at least one key emerging market is already musing about a
possible policy-induced double-dip in growth, which would likely delay the
recovery process. A third factor is the prospect of interim market volatility.
Many market watchers agree that prices of key commodities and premiums being
charged on more risky ventures seem out of line with reality. A rapid
realignment to reality is a threat to confidence just ahead of the
long-awaited recovery.
The bottom line? If we overcome these hurdles, the outlook for world growth
and global trade flows is sure to improve as the year wears on. There is a lot
to look forward to in 2010 and beyond, and if we learn lasting lessons from
the recession of 2009, we have good cause to say, ‘Happy New Year!’
The bottom line? 2009 is ending on a nervous note, but economic
indicators are improving, giving hope for a better 2010.
The
views expressed here are those of the author, and not necessarily of
Export Development Canada.
©2009
EDC
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