MRO Magazine

Global economy to ease into sustained expansion in 2005, says EDC forecast (November 10, 2004)

Ottawa, ON -- World economic growth will settle into a more modest pace of expansion in 2005, according to the late...


Industry

November 10, 2004
By MRO Magazine
MRO Magazine

Ottawa, ON — World economic growth will settle into a more modest pace of expansion in 2005, according to the latest semi-annual global export forecast by Export Development Canada (EDC).

"The global economy has passed its high water mark, and we are beginning to see signs of moderation in world economic growth," says EDC senior vice-president and chief economist Stephen Poloz. "As a result, the economy should grow at a pace that is more sustainable — a pace that is neither too hot nor too cold, but just about right."

EDC is forecasting 3.9% economic growth for the world in 2005, down from 4.4% this year. At the same time, economic growth in Canada is expected to reach 3.2% in 2005, roughly on par with 2004.

Asia, not including Japan, will again set the pace next year with an average expansion of about 6.5% compared with more than 7% in 2004.

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The U.S. economy is projected to grow by 4.2% this year and by 3.3% in 2005. Growth of about 2% is expected for Western Europe in 2005, compared with an average expansion of 4.7% for Central and Eastern Europe. The Middle East and North Africa will continue to reap the benefits of high oil prices, growing by close to 5% in 2005, while sub-Saharan Africa should expand by close to 4%.

CANADIAN EXPORTER’S SALES TO JUMP 9%

This year’s strong global economy will benefit Canadian exporters as sales are projected to post 9% growth, ending three years of declining export sales. However, as the global environment begins to change and economic growth returns to a more sustainable pace, Canadian export growth is also expected to ease a little. Although export volumes will grow by a healthy 4% in 2005, lower prices for some resources products will result in a moderation to 1% growth in export revenues.

The majority of Canada’s industries posted stronger export growth in 2004, and the trend should continue next year, although the strength of the upturn will vary across sectors. Resource based sectors (mining, energy, chemicals, forestry) led the way in 2004, rising by an estimated 14% this year, with improvement in both export demand and prices. In 2005, the base will remain strong, but export growth will be more modest because of the impact of softer pricing.

Transportation, travel, tourism and commercial services should also continue to make gains in 2005, rising by 5% to CAD 66.7 billion. Similarly, the high-tech, and machinery and equipment sectors have bottomed and are also expected to see continued export growth next year. Agri-food exports have recovered this year, but uncertainty over recent crop yields and the continued ban on cattle introduces some risk into the outlook.

The aerospace sector is the only major industry showing weakness in 2004, and little improvement is expected next year. Conditions in the next 12-18 months will also remain soft for the consumer goods and auto sectors.

At the provincial level, export performance will be dictated by the province’s industry mix. British Columbia, Saskatchewan, Manitoba, Quebec, and New Brunswick, which led national export growth this year, export a high share of commodities and resource-based intermediate goods. These provinces will likely see a moderation in export growth next year because of lower prices for forestry and metal products. Likewise, Alberta, New Brunswick, Newfoundland, Nova Scotia, and Saskatchewan export energy products and they too will experience more restrained export growth because of stable to falling energy prices in 2005. Sectors such as industrial goods and agri-food in both Ontario and Quebec performed well this year, but the key drivers in these provincesaerospace in Quebec and autos in Ontariowill continue to under perform, keeping export growth at modest levels next year.

Geopolitical tensions, particularly in the Middle East will continue to linger next year, meaning that oil prices will also remain vulnerable to developments in the region. "Oil prices need to be monitored carefully," said Mr. Poloz. "If they continue to rise, this could cause a break in the economic momentum that we are calling for in 2005."

The major central banks are likely to continue to move interest rates gradually higher during the next 12-18 months." To some extent this is a precautionary move on the part of the banks who need to prepare for a potential economic slowdown," added Mr. Poloz. "Otherwise, with rates at the levels they are now, there would be little ability to respond." In contrast, countries such as Brazil, China, India and Poland are already having to deal with upturns in inflation.

Mr. Poloz maintains that because interest rates will move according to local inflationary conditions, exchange rate volatility is likely to persist. However, as global growth eases, resource prices level off, and interest rates converge, the Canadian dollar is expected to retreat and average U.S. 75-78 cents in 2005. Nevertheless, temporary fluctuations outside this range remain probable.

EDC’s Global Export Forecast is available at: www.edc.ca/docs/ereports/gef/EFindex_e.htm

EDC provides trade finance and risk management services to Canadian exporters and investors in up to 200 markets. Founded in 1944, EDC is a Crown corporation that operates on commercial principles.