Outlook 2013: Let It Rise

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By Peter G. Hall, Vice-President and Chief Economist EDC *

Another New Year, and a chance for a fresh start. Will this prove to be the one that finally fires up the global economy? To answer, it's tempting to borrow from Berra - in many ways, it seems like 'deja vu all over again'. For three successive years, the world economy has started well, and then fizzled mid-year. Are we in for the same again, or is it different this time - can we genuinely say with firm hope, Happy New Year?

Make it four - we do indeed have momentum going into 2013. The US economy remains resilient, with the housing sector, the mighty consumer and the non-committal business sector all finishing last year with a solid burst of activity. It's all the more impressive in light of the Hurricane Sandy disruption and the end-year fiscal cliff impasse. Large emerging markets, notably China, are reigniting. Europe's numbers are not as buoyant, but lower fiscal drag in 2013 suggests impending improvement.

On its own, momentum isn't enough - the past three years are proof enough. But the hidden blessing in the delayed global recovery is the rise of pent-up demand. Four years of suppressed activity have exhausted the excesses of the past cycle, and the world economy is poised to return to normal levels of activity.

Are demand pressures now sufficient to overcome the ever-present threats to growth? Unfortunately, 'Out with the old' is easier said than done. Europe and Japan cannot simply shrug off their monstrous public debts, and dithering on its debt dilemma could cost America dearly. Exposed as they are to these debts, financial markets remain jittery. Political instability - particularly in the Middle East and North Africa - remains a key threat to growth. Emerging markets need to prove that they are truly on the mend, and can overcome higher short-term food and energy prices. These risks are all exacerbated by persistent low confidence, which causes markets to overreact to every new twitch.

The threats are hefty, but so is the pent-up demand pressure. This development could take the economy to a new phase, unlike 2009-10 where huge stimulus was supposed to engineer a rise in activity, and 2011-12, where we merely hoped for a rise. Now, as the economy is growing more organically, we are in a better position to just let it rise.

Growth is forecast to begin in the US economy, and spread to the rest of the world. Momentum is strongest there, and will push growth to
2.8 per cent this year. Europe and Japan will be laggards, but higher US performance will help emerging markets to power up again. This will lift world growth from 3.3 per cent last year to 3.8 per cent in 2013, and set the stage for an even higher growth trajectory as we move into next year.

Higher export potential is coming to Canada just in time. With housing markets faltering, consumers running out of steam and fiscal withdrawal further eroding growth, our economy will be more trade-dependent in the medium term. Thankfully, export growth is forecast to rise from 3.5 per cent in 2012 to 6.6 per cent this year. Growth will be well distributed, led by key primary industries, and with metals and advanced technology bringing up the rear.

The bottom line? Years of hoping for something better than the mediocre stuff we saw has us all more jaded about future prospects. Higher growth addresses the big risks, and helps to quell our persistent fears - and it's on the way. Happy 2013!

APRIL 2017

Vol. 11 - No. 9










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