Like it or not, that’s where the world economy is at present. Six months of freefall down a pretty sheer cliff, and everyone’s still a bit dazed, wondering if this is a V-, a U- or an unusually W-shaped valley. Spirits rose when the freefall ended, but that seems to be giving way to the realization that the trek out of the valley will be prolonged and hazardous. What is the near-term outlook for the economy?
Activity may well have stabilized, but forecasts are still falling. In part, this is catch-up; the economy simply fell further than was expected. But it also reflects the uncertainty of the coming months. EDC’s outlook for the global economy was already weak, but the Summer 2009 Global Export Forecast has been revised downward. We now expect that the world economy will contract this year by 1.7%. To put this in context, normally a world economy in recession would actually see growth of between 1% and 2.5%. The projected contraction is the weakest outcome the planet has seen in six decades.
If there’s good news in the shocking decline, it’s that global commerce is actually working off the huge excesses that piled up in the boom years. The bad news? The pile was so high that we still have a way to go before balance is restored. Plotting a course through this delicate ‘in-between’ zone is tricky. Activity is lower, so cash is tight. Low demand is pummelling prices. It is much more difficult to access capital. Commerce is more tentative, and is expected to remain this way well into 2010.
This year’s contraction is so deep that no region or individual economy will be unscathed. As a trading nation, Canada is deeply affected. Exports are forecast to plunge by 21% this year, by far the largest single-year drop on recent record. The extraordinary drop reflects a combination of plummeting export prices and sharply weaker physical shipments. Given the global environment, prices for everything, from oil and gas to base metals, forestry products, services and high-end manufactured goods will remain suppressed in the near term. Exporters will be partly shielded by a weak Canadian dollar – forecast to hover in the US 83-85¢ zone over the next 18 months.
Double-digit declines will hit most industries’ foreign sales this year. Former high-fliers – energy, fertilizers and base metals – will sustain the biggest drops, with an average decline of 38%. The auto sector will see a repeat of last year’s 22% decline, an amputation of activity that reflects collapsed US demand and restructuring of domestic production. Already in a multi-year decline, the forestry sector will see a further 14% drop as pulp and paper shipments falter. Momentum will favour the rail sector this year, but weakness will be delayed into 2010, when most other industries will stabilize.
Global recovery is not likely to begin until the latter part of 2010. Growth will return next year, and at first blush, the 2.7% increase looks respectable. However, it is barely above a recessionary pace, and given this year’s tumble, it amounts to baby steps out of a deep valley. Moreover, it comes with heavy public assistance. Based on OECD estimates, public stimulus packages are contributing about 1% to 2010 growth, without which we would still be in a protracted recession. Policy measures are already kicking in, and their effects will be more obvious this fall. But true recovery will be a 2011 thing.
The bottom line? We’re in a deep, unfamiliar valley, and getting through it will be challenging. But the challenges will reveal new pathways and prospects that, if seized, will lead to a much brighter future.