Threats to recovery remain as economy in critical zone

08:21, April 29, 2010      

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Canada's exports are forecast to rise by 11 percent in 2010 as they begin to rebound from the worst year on recent record, but a number of threats remain before world demand moves beyond the critical zone, according to the Global Export Forecast released Tuesday by Export Development Canada (EDC).

"Despite over a year of proclamations to the contrary, global recovery remains elusive," Peter Hall, Chief Economist at EDC, told reporters.

Genuine Recovery Requires Much More Sustained Aggressive Growth Pace

"It's true that growth has resumed, and some of the movement is eye-catching. But there is a big difference between the end of recession and the start of recovery," said Peter Hall, while stressing that genuine recovery requires a much more sustained, aggressive growth pace than people have experienced to date, and much higher levels of activity than they currently see.

"We may have recovery in our sights, but we're not quite there," said the economist.

EDC's forecast noted that while some of the current growth numbers are positive, they are supported by a heavy dose of public stimulus. The value of total developed-economy stimulus spending is worth nearly four percent of Organization for Economic Cooperation and Development (OECD) GDP, a significant impact when compared with average annual growth in these economies.

"Essentially, stimulus is buying time until the true recovery kicks in," said Hall. "Are we almost there? We won't arrive until the enormous excesses that piled up at the end of the boom period are worked down. The good news is that the work-down has been steady and aggressive. The bad news is that we'll have to wait until year-end before market balance leads to a typical resurgence of key economic drivers."

Four Key Risks Makes Its Way through Recovery toward Sustainable Growth

EDC believes that there are four key risks to the economy as it makes its way through recovery towards sustainable growth, which includes fiscal stimulus, financial markets, soaring commodity prices and inflation.

Fiscal stimulus has posed a problem to the economy because it will soon stop contributing to bottom-line growth. Special measures successfully rescued Western financial institutions following their near-collapse late in 2008, but they still face one more test: loan defaults are now hitting peak levels.

As for the commodity prices, the EDC forecast points out that crude oil and base metals prices have seen very strong growth recently, but the price increase has been accompanied by high and still-rising inventory levels, surplus productive capacity, and low aggregate demand.

"These risks promise to keep the caution level in the economy high enough that challenges are likely to be managed swiftly and with the same coordination that has made recent measures so effective," Hall said. World Growth Forecast to Reach 3.7 Percent in 2010

EDC forecasts that world growth is likely to reach 3.7 percent this year, a vast improvement over the 1.1 percent contraction in 2009, but still not enough to be called a true recovery. Further improvements in fundamentals will lead to an expected 4.2 percent expansion in 2011.

It forecasts that developed economies will be well shy of the average this year but will gain ground in 2011, while emerging markets promise faster and steadier growth.

EDC expects Canada's growth to rise by 2.5 percent this year and 2.9 percent in 2011, following a decline of 2.6 percent in 2009. It also believes export growth will be stronger, and certain industries like the auto sector will post double-digit gains. However, even for the faster-growth sectors, activity levels will still be well below previous peak activity by year-end.

"The recession pummeled Canadian exporters, but once recovery sets in, growth will rise sharply until the economy returns to normal production levels. That period is in sight, and if we manage well through the critical zone, our next big challenge will be accommodating that aggressive growth,' added Hall.

Source: Xinhua


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