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The
Critical Zone
BY
PETER G. HALL 
EDC Vice-President
and Chief Economist
It
was the best of times. In late 2008, it turned into the worst of times.
Then came abject pessimism, followed by a period of uncertainty and
volatility. Sentiment was tentative as the world economy entered 2010,
but the resumption of growth has lifted spirits, and prompted
economy-watchers to hail the long-awaited recovery. Is this nascent rise
the real thing, or does recovery still elude our grasp?
Recent growth has been impressive. US Industrial production has risen by
an annualized 8% since mid-2009, and the EU has doubled that pace. GDP
growth is impressive in developed and emerging markets alike. Most
indicators are on the rise, and the general increase in activity is
comforting. But two facts temper the enthusiasm. First, in spite of the
growth, on many fronts the economy is still operating well below the
previous peak of activity. Second, a large share of growth is due to the
many aggressive public stimulus programs that were announced shortly
after the onset of recession.
These facts would be less worrisome if the economy were firing on all
cylinders. Unfortunately, big-economy consumers, a huge component of
global GDP, still seem to be holding back. It is true that consumer
confidence rebounded from the perilous lows seen in early 2009. But the
rise was checked, and confidence remains in a holding pattern at levels
consistent with mediocre growth. Moreover, Western housing markets, a
key leading indicator of overall activity, remain extremely weak.
Pre-recession excesses are being worked off, but markets will not be in
balance until the second half of this year, suggesting that a more
traditional economic recovery is not likely before year-end.
That’s close enough that we can now see it, and if the economy can
bump along at a decent pace, half a year is not too long to wait. But
even the short remaining distance on this rickety rope-bridge we are
using to traverse between recession and recovery is treacherous. The
global economy must weather five present threats before the year is out.
First, growth from fiscal measures may not tide us through year-end.
Second, big Western banks are only now seeing default rates peak, a
second key test of their viability, and they are further threatened by
possible sovereign defaults. Third, commodity prices seem out of line
with demand and supply conditions; an abrupt price recoil could tip
recovery off-course. Fourth, premature unwinding of monetary stimulus
could likewise hijack recovery. Finally, any hiccup in growth could
restart protectionist rhetoric, with more damaging consequences this
time.
It’s this gauntlet that makes the next six months the world
economy’s critical zone. Will we make it through? Time alone will
tell, but the economy’s current momentum and the collective will to
prevail over the tough times should be enough to see us through this
last, difficult period. In this context, EDC’s Spring 2010 Global
Export Forecast expects world growth to reach 3.7% this year, following
the unusually deep 1.1% contraction in 2009. Growth is forecast to rise
further, to 4.2% in 2011.
On the heels of a 2.6% decline in 2009, Canada’s economy will rise by
2.5% this year and 2.9% in 2011. Exports will drive overall growth, with
increases in foreign sales of 11% in 2010 and 7% in 2011. Industries
most hurt by the recession are forecast to see more aggressive near-term
growth.
The bottom line? The world economy still faces key near-term challenges
as it beats a path to recovery. We will get there, but for the moment
our optimism is tempered with a good dose of caution.
The
views expressed here are those of the author, and not necessarily of
Export Development Canada.
©2009
EDC
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