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 three-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 per cent 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 per cent.
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 per cent this year before it eases to 2.5 per cent in 2011. Export growth will follow this pattern, slowing from 11 per cent this year to 6 per cent 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.