Economists continue to moderate their forecasts for the global economy as they reset their expectations for growth in China and other developing markets.
Most recently, in its July 2013 Monetary Policy Report, the Bank of Canada revised its expectations for global growth to a modest 2.8 percent this year, compared to three percent in its April forecast. Slightly slower growth is now also expected in 2014 and 2015.
The good news is that the global economy is growing and the troubles plaguing the world’s advanced economies seem to be easing.
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The United States continues on the road to recovery. The European Union appears to be stabilizing and the Japanese economy is showing signs of life.
The problem is that China and other emerging economic powerhouses appear to be settling into a period of more modest expansion.
Of course, even growth that’s “modest” in China dwarfs the best that most other countries could hope for. The Chinese economy is still expected to grow at 7.3 to 7.5 percent annually through 2015, more than three times as quickly as Canada.
However, this is well off the torrid pace of recent expansion in China, which averaged 10.5 percent every year from 2003 to 2012.
Two main factors are contributing to slower growth in China:
- The Chinese economic boom has been driven by exports and capital investment, both of which are abating in the face of reduced global demand.
- Related to the investment issue, China is also tightening access to credit as part of a series of reforms aimed at improving the stability of the financial sector.
The repercussions of slower growth in China and other emerging economies are being felt around the world, including in Western Canada.
Softer demand is weakening global commodity prices, especially for base metals and minerals.
While prices for those commodities remain well above historic levels, they have been falling more or less steadily since late 2010. Prices have dropped by nearly 11 percent in the first half of 2013 alone.
Forest products have also turned down since April, wiping out five consecutive months of gains in a sector that has for years struggled against flat prices.
Western Canada’s overall exports to China continue to expand rapidly, but there is little doubt that slower growth in China has sapped some of the momentum.
Exports were up 12 percent from January to May compared to the same period last year. It’s a healthy rate of growth, to be sure, but this is well below the 22 percent per year average increase since 2009.
At least part of the blame can be pinned on base metal exports, which were down 1.1 percent through the first four months of the year.
In particular, the value of Western Canada’s copper, nickel, iron and steel product shipments to China are well below last year’s levels.
Considering how much metal and mineral prices have risen over the past decade, a decline of 11 percent is not likely to have a major effect on the mining industry in Western Canada.
Only gold miners have reason to be worried, and in that case, the plunge in gold prices over the past few months is unrelated to the economic situation in China.
The bright side for Western Canada is that structural changes in the Chinese economy will open new export opportunities.
The Chinese government has responded to the heavy pollution and severe income inequality that resulted from its export and investment-led development strategy by focusing its future policy efforts on expanding domestic demand and ushering in an era where consumers are the main engine of growth.
Exports of western Canadian food products into China are already soaring. As Chinese citizens become wealthier, other opportunities to sell consumer goods into China will appear.
Michael Holden is a senior economist with the Canada West Foundation. This article appeared in the foundation’s publication Currents.
