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Is Growth its Own Worst Enemy?

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By Peter G. Hall
Vice-President and Chief Economist Export Development Canada

Januaries are jinxed. Look at the data: in the past five years, there has been some big unpredictable event in the opening weeks of the year that has nixed first-quarter global economic performance. This year was no exception. In fact, the jinx jumped the gun. On day one back at our desks, China’s stock market tumbled so fast it closed itself down. What hurt more was the almost instant ricochet into other markets. Equities, bonds, commodities and currencies were all caught up in the fast-spreading mayhem. It fed into a marketplace desperate to leave the turbulence of 2015 behind it. Instead, things got worse.

Chaos continued for about six weeks, and then, a turnaround – of sorts. Without warning, equity markets stopped sliding, and then started to rise. Commodity prices came off their lows, and the abject pessimists got less air time. Currencies followed suit, and bonds were better behaved. It was a relief, but the sense of unease continued. Although confidence held up, jitters seemed to influence actual economic activity. Data for the period are still coming in, and they are mixed. Forecasts are being downgraded – again – stoking that sense that we are in a protracted growth funk that’s becoming harder to get out of.

Are we re-weakening? Generally speaking, no. What seems to have been almost missed by the media and profiled expert analysts is that the resulting market chaos is not about neo-weakness or deprivation. It’s actually the strongest signal in recent years of the global economy’s return to growth. It is growth that caused the Fed to inaugurate the rate-tightening cycle on December 16, sparking the latest round of turmoil.

Where is the growth? The US economy is soldiering on. Pent-up demand is driving consumer spending and housing activity, spurring business investment, and creating jobs by the boatload. As a result, US consumers are in great shape: new jobs mean new incomes, tighter labour markets mean real wage gains, deleveraging has reduced interest costs, confidence is up, and lower gasoline prices have generated a $110 billion bonus, much of which still has to be spent. They, together with an industrial complex that is pushing the limits of capacity are driving the acceleration in US GDP that we expect through 2017.

Spillover growth from the US and pent-up pressures at home are expected to add momentum to the European economies. The Euro Area has actually experienced growth above its long-term average for the past 6 quarters. This is forecast to continue over the next two years as Europe stages a measured comeback.

Market mayhem’s venom has had more effect on emerging markets. Commodity-dependent economies and their currencies are reeling. Yet even they seem to be benefiting from the return to global growth: lower pricing is boosting commodity demand, and cash-rich multinationals are hunting for investment bargains. While insufficient to offset negative effects, it’s unexpected relief.

The BRICS aren’t helping much. Russia, saddled by sanctions, plunging oil prices and costly military campaigns, is in deep recession. Brazil is worse off, falling by almost 4 per cent last year, and a further 3.2 per cent this year. Commodity-dependent South Africa will have a challenging year. But the news isn’t all bad: amid its bubble-troubles, China’s 6-per-cent-plus pace will still help to drive overall demand. And India has now vaulted ahead of China, boasting near-term growth ahead of 7 per cent.

Early-2016 challenges will keep global growth at 3.1 per cent this year, according to EDC’s Spring 2016 Global Export Forecast. However, strong fundamentals will lift growth to 3.5 per cent in 2017. Canada will capitalize on this: while energy exports will see another tough year, strong US performance and a weak loonie will spur double-digit growth in exports of autos and auto parts, consumer goods, and aerospace products. Total export growth will rise from 2 per cent in 2016 to 6 per cent next year.

The bottom line? Growth is back, but many don’t see it. Turbulence, the fallout of lower commodity prices and pre-existing risks all loom large, and are eclipsing the growth story. It has turned into a psycho-cycle, with both stories vying for attention. It’s a rare juxtaposition, and there are few precedents for what’s at stake. But growth is expected to prevail. It has thus far, and usually does when fundamentals are as they are today.

[Source: EDC]

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