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EDC analyzes summer setback in global economy

Ottawa, ON -- Two steps forward, one step back. That seems to be the current cadence of the world economy. While it suggests progress, it is frustrating. The momentum that was clearly building over the past year has recently downshifted. Is...


Ottawa, ON — Two steps forward, one step back. That seems to be the current cadence of the world economy. While it suggests progress, it is frustrating. The momentum that was clearly building over the past year has recently downshifted. Is this the best the global economy can do, or are better times ahead?

Panning across the data can be discouraging. First-quarter 2011 GDP slowed on a wide global front, and industrial production softened almost universally in April. International trade activity was uneven, and dramatically weaker in key regions. Loss of momentum was broad enough to suggest slowdown.

Put in context, the story is less sombre. One-off events have added a lot of noise to the numbers. Natural disasters, chiefly (but not exclusively) the devastating earthquake and tsunami in Japan, disrupted global supply chains, interrupting the rising tide of activity. Political turmoil in the MENA (Middle East and North Africa) region was similarly disruptive. The problem is not so much with global demand, but with constraints on supply that may well prove temporary: production in Japan is already rebounding, and the ‘political premium’ on oil prices has been offset by the release of strategic global reserves. Problems solved?

Not so fast. The disruptions added to an environment already charged with key risks. These threaten to make any setback in activity self-fulfilling. Note the lingering effects of high oil prices and tumbling stock markets on consumer and business confidence – a condition that threatens to translate a supply-side problem into a demand issue, with more serious implications for the short-term outlook.

It is too soon to tell, but early signs suggest that demand remains firm. Leading indicators are picking up, and so far, orders for industrial goods are rebounding. All eyes are on upcoming data releases for additional evidence of strength. Progress on Greek sovereign debt woes and lower world oil prices should lift spirits, helping the world economy to recapture the momentum that ushered in 2011.

Negative developments lead to an initial downward revision to forecasts that will likely prove to be an overreaction. EDCs Summer 2011 Global Export Forecast projects that the US economy will grow by just under 3% this year and by an impressive 3.3% in 2012. This will help to pull along the more sluggish European and Japanese economies, and lend support to steady growth in emerging markets. This adds up to a world economy that will rise by 4.0% in 2011 and 4.3% next year.

Canada will benefit from US strength and from a resumption of a broadly-based trend toward diversification of exports into less-traditional markets. Exports are well on their way to double-digit growth of 12% this year. A slightly lower Canadian dollar will combine with higher global demand to push higher value-added exports up sharply in 2012. Although overall growth is forecast at a more muted 5.8%, lower commodity prices are masking an acceleration in actual volume shipments. This helps to counter the effects of domestic weakening, resulting in an economy-wide growth forecast at 2.7% for this year and 2.4% in 2012 – decent performance, all things considered.

The bottom line? Forecasting remains a tricky business as the global economy navigates the often-turbulent zone between the end of recession and the beginning of true recovery. One by one, we are managing the big risks, and if the track record continues, 2012 will be a head-turning year.

Peter G. Hall is vice-president and chief economist, Export Development Corp.