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 per cent 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 per cent this year, following the unusually deep 1.1 per cent contraction in 2009. Growth is forecast to rise further, to 4.2 per cent in 2011.
On the heels of a 2.6 per cent decline in 2009, Canada’s economy will rise by 2.5 per cent this year and 2.9 per cent in 2011. Exports will drive overall growth, with increases in foreign sales of 11 per cent in 2010 and 7 per cent in 2011. Industries most hurt by the recession are forecasted 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.