Some trouble spots remain | Economist says recovery bodes well for Canadian exports
Happy days are here again as the world economy moves into growth mode, says the chief economist for the Conference Board of Canada.
There are some exceptions to the turnaround, but for a trading nation like Canada, recovery among many of its business contacts is real, particularly in Asia where average annual economic growth is six percent.
“Emerging markets are now half the global economy and that is where the strongest growth is,” Glen Hodgson told the International Livestock Congress in Calgary July 9.
China has captured everyone’s attention, especially after recent deals to expand Canadian beef shipments and other commodities were formalized in June.
Its growth is stable at seven to eight percent with improved personal incomes and further movement toward a free market economy.
“The demand for protein will be one of the key factors in China,” Hodgson said.
Japan is another destination for Canadian goods.
The country’s growth is stable at 1.5 percent, but it has the highest level of gross debt in the world. The government has decided to print more money and stimulate its economy rather than borrow.
It is also negotiating to enter the Trans Pacific Partnership, and Hodgson said it may be willing to set aside protection of the rice sector to get a trade deal that will help rebuild its economy.
Other countries are also improving.
The recent election in India may bring economic reform. The new prime minister is committed to opening markets, and Canada is pursuing a free trade agreement to gain access to more than one billion potential customers. However, it could take three to five years to formulate a deal.
Brazil’s growth rates are falling. The government must consider investment in education and address income inequality.
“Brazil is a great competitor for Canada in ag products so reform is important for global growth.”
Russia has been a trading partner in the past, but it is sinking into recession. The International Monetary Fund estimates the capital flight from Russia is up to $100 billion, and growth has fallen to zero. It is also losing population through emigration and lower life expectancy.
“There are fundamental structural problems within Russia,” Hodgson said.
He said many of the problems are political, and the blame rests with president Vladimir Putin’s policies.
“Russia will be really challenged to have any economic growth, and Mr. Putin seems to be completely unaware of that through his adventurism,” he said.
Canada’s recent trade deal with the European Union offers other opportunities, particularly for the beef and pork sectors.
However, Hodgson said the deal is not perfect. The EU’s population of 500 million looks enticing, but there is little economic growth.
Germany is the economic leader and carries the rest of the continent. However, growth in Great Britain could be more than two percent this year.
“It is great we are now going to have a free trade deal with Europe,” he said.
“It will be great for beef exports and you could win market share, but the overall growth of the market will not be profound.”
Canada’s main trading partner remains the United States, where real growth is occurring. The unemployment rate is down, housing prices are up and vehicle sales are rebounding.
Canada needs to pay attention to the U.S. trend toward energy self-reliance.
Fracking and horizontal drilling have helped the U.S. increase its oil production by one million barrels a year, so it buys less from others, including Canada. It could cut its oil import bill by half as it continues to gain self-sufficiency, so Canada must find alternative markets.
The bad news story for the U.S. is a federal deficit of around half a trillion dollars.
“It will never get back to balance,” he said.
Canada’s outlook is modest but stable with economic growth forecast at two percent, and it should pick up next year. The growth slowed because governments are trimming spending to to get back to balanced budgets.
“It is not a very sexy story,” he said.
On the business side, investment is weak.
“We are sitting on a mountain of cash,” Hodgson said.
The conference board estimates Canadian corporations have $625 billion in cash sitting idle in bank accounts because they are afraid of the future.
“We are missing the boat right now, and we may come back and be haunted by this, particularly if the dollar goes higher,” he said.
“Private investment is a real lagging factor in our economy,” he said.
Interest rates have remained low at one percent or less, and the loonie should hover around 93 to 94 cents US.
Hodgson said trade with the U.S. is not growing because Canada is starting to diversify into other countries.
“That is why free trade deals with Europe and India and Korea and maybe one day with China are good, because it adds to diversification,” he said.
Canada is also edging toward full employment, but there will be considerable stress on western labour markets. This can affect the entire value chain, so companies must find ways to be more productive with fewer people.
Consumer debt is a significant concern. Canada stands No. 3 in the world when it comes to indebtedness.
Government finance ministers have lectured Canadians for four years to do something about their debt, which has been financed with low interest rates. Credit card debt with high interest rates is another problem.
Hodgson said this cannot go on forever, and some people may be hit hard when interest rates start to rise. However, he does not anticipate bankruptcies.
While governments work to balance the books, local economies range from strong to stagnant.
Hodgson said Alberta, British Columbia and Manitoba will have the strongest economies next year.
Alberta is growing at a rate of 3.5 percent and is the fastest growing jurisdiction in North America. However, it needs to find a way to get its oil to market to continue the momentum.
B.C., Manitoba and Nova Scotia will be at 2.2 percent growth, and Ontario will experience 1.5 percent growth.
Nova Scotia and Newfoundland are relying on offshore oil to fuel their economies. New sources are needed to stay in good shape.
Saskatchewan growth will be less than one percent for the coming year. Farmers harvested tremendous crops last year, but they could not get to market and this summer’s flood will take away some of the province’s growth. Crops will be lost and disaster payments will be high.