January 24, 2012
2012 holds promise but there’s no denying the uncertainty (part 1)
Chief Economist, CanaData
The following is an assessment of where the world economy presently stands, with additional observations on specific problem areas and how things might turn out differently than expected.
Pertinent comments on the implications for Canadian construction markets are interspersed throughout.
Let’s begin with the context. There are three pillars to the world economy: 1) North America, led by the United States; 2) Europe, with Germany in the lead; and 3) emerging nations, mainly in Asia, where China is in the forefront.
Japan should be more prominent, but the fact growth in that nation has stagnated for almost two decades has rendered its impact a great deal less than it should be.
Debt problems and severe austerity measures have lowered expectations for gross domestic product (GDP) change in Europe close to 0.0% in 2012. Parts of Europe may slip back into recession this year.
On the possible upside, the fact the Euro is in decline versus the U.S. dollar may provide enough of a boost to German export sales to raise growth a little faster than expected.
On the downside, if Greece or another heavily indebted nation withdraws from the Euro zone, the strain on the banking system will lower GDP expectations even further.
Such a possibility has been widely known for a long time. Financial institutions have been increasing capitalizations to lessen the blow in such an eventuality.
China’s exports will feel the effects of slower growth in Europe. Beijing has also deliberately initiated steps to reduce inflation and deflate residential and commercial property price bubbles.
Tighter credit will likely see China’s GDP growth decrease to 8% this year from around 10% on average over the past decade. A growth rate of 8% would still be relatively strong compared with almost anywhere else in the world.
The slowing in China’s growth rate has already meant a reduction in the world-wide demand for commodities. China has been accounting for about 40% of world demand for major metals and minerals.
The price impact so far has been relatively mild. Nevertheless, there are negative implications for investments in some of Canada’s major resource projects.
Tempering the price declines, however, is another aspect of Chinese interest in commodities.
Beijing is looking to invest in foreign resource projects. It has approximately $3 trillion in foreign currency reserves that it can spend however it likes.
China’s leaders are thinking strategically. They want to line up raw material sources not just for the moment, but for the longer term.
As a result, in the earliest days of 2012, newspaper stories have featured headlines about Chinese firms buying stakes in energy companies in Canada and the U.S.
Chinese enterprises are becoming more confident as international players. No longer are they simply taking junior partnership positions in foreign entities. In many cases, they are now purchasing outright control.
One marked and noteworthy turnaround versus the last several years has been the improvement in the U.S. economy.
Employment in America has been climbing consistently for more than a year. The jobless rate has been falling, manufacturing has been on a roll, retail sales are doing well and consumer confidence is lifting.
The biggest problem for the U.S. economy continues to be the housing sector. Lending institutions are being ultra-cautious in granting mortgage approvals
Also, home prices need to show some spark. Excessive foreclosure rates have left both resale and new home prices in a tailspin. They may finally be bottoming out.
One segment of the U.S. residential real estate market has definitely come back to life, rentals.
Turning now to Canada, commodity demand from emerging nations has been a big part of this nation’s resiliency since the recession. It won’t be as big a contributor in 2012.
Instead, Canada will return to a more traditional pattern of growth. U.S. GDP will expand at a 2.5% rate and we’ll trail behind with a figure closer to +2.0%.
There are several thickets along this path. The U.S. is not welcoming our exports to the same degree as in the past.
The U.S. housing sector is still a year or two away from being anything like its former self. This will continue to inhibit our lumber exports.
Even when the U.S. housing sector does pick up, there are likely to be court challenges to Canadian imports, the softwood lumber agreement notwithstanding.
This has simply been the pattern in this industry over the past 100 years.
In fact trade issues with the U.S. are becoming increasingly problematic. Due to tight oil and shale natural gas deposits, the U.S. is moving closer to energy self-sufficiency.
Canadian oil exports to the U.S. have stayed strong but natural gas sales have been struggling.
At this current date, almost 10 months away from the Presidential election, the delay in approving TransCanada’s Keystone XL oil pipeline is one example of how American politics can override Canadian business interests.
The U.S. will be a fickle trading party at least through November of this year. If Obama is returned as president, expect more of the same wavering on trade issues as we’ve seen over the past three years.
The Republicans are more willing to do whatever it takes to lift America through better positioning in the world economy.
GOP leaders have already indicated support for the Keystone XL pipeline because it will create jobs and lower reliance on Middle Eastern oil.
The presidential election will also determine how quickly an agreement between Canada and the U.S. to speed up the flow of goods across the two borders moves from platitudes to practical solutions.
To be continued in Economy at a Glance Vol. 8, Issue 10.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.
