Ready for Economic White Water?
By Peter G. Hall
Vice-President and Chief Economist Export Development Canada
Most people aren’t. It has been a long, cold, snowy winter in most parts of Canada, and spring is coming as a great relief. With the warmer temperatures, the spring runoff is starting, and warnings about high, fast-running water are cropping up. Sounds a lot like the global economy. It has been a long winter of hobbled growth and frequent storms that have threatened to bring things to a standstill. But the long-anticipated thaw is happening, and water levels are rising. We are heading toward economic white water, and many still have a winter mentality. Can we handle what’s ahead?
It sounds fanciful, perhaps a bit mad. Let’s face it, there are some who are six or seven years into their careers and have never yet shot the economic rapids. And there are likely experienced paddlers out there who have lost the knack. It can get comfortable gliding along a still lake, not realizing that the water levels are rising. So if a rapid rise is happening in the world economy, what is the proof?
Check out the key indicators. Sure, they dipped earlier this year, but the severe North American winter was largely responsible. Barring that, the OECD leading indicator has risen in 17 consecutive months, and early indications suggest more is on the way. Also, governments will be a far smaller drag on growth, as restructuring will be completed this year and next. Then there’s pent-up demand, most obvious in the US economy. Home building is far behind the needs of the population, and inventories of available dwellings are getting perilously low, suggesting a resumption of the building boom. Americans are still driving clunkers, but can now afford to get out of them into something newer. Businesses the world over have been under-investing for at least a half-decade, and capacity is tightening. In the US, it’s just a shade below the pre-recession peak, and rising. It’s time to invest.
The pressure to do something may be building, but it looks like we are all needing a lot less prodding. Across much of the industrialized world, confidence continues to rise, both at consumer and business levels. That’s a major achievement, given the prolonged psychological battering we’ve endured.
These developments suggest that the world is in for a run of growth that we haven’t experienced in a long time. EDC's Spring 2014 Global Export Forecast, released today in Burlington, Ontario predicts that the US economy will take the lead, rising 3 per cent this year and just under 4 per cent in 2015. The EU will remain in the black and gain strength next year. Developed markets will be the world’s near-term dynamo, lifting planet-wide growth to 3.7 per cent in 2014 and 4.3 per cent in 2015.
Emerging markets will also be drawn into the flume. Years of relying on internal strength will give way to a resumption of robust growth in trade, fueled by demand from the developed world. However, as demand rises emerging markets will have to cope with a tightening of the loose credit conditions seen in the post-crisis period, as quantitative easing programs are wound up.
Canada will see timely benefits as global trade picks up. Prospects for the domestic economy are not strong, but exports are already rising nicely. Domestic weakening should help to free up capacity for exports, which is running pretty tight in some industries. In others, there is capacity to absorb growth. And as companies are generally flush with cash, we expect a significant increase in business investment through 2015. Exports are expected to see inflation-adjusted growth of 6 per cent both this year and next, bringing economy-wide growth to 2.8 per cent in 2015 from 2.2 per cent this year.
The bottom line? There are solid reasons to expect a sudden and sustainable rush of growth this year. Success will mean plotting the right course through the rapids, and avoiding the rocks.