Economic News/Trends and Analysis — February 3, 2010

Global Recovery Has Achieved Liftoff, But The Flight Path Will Be Turbulent, According to Scotiabank Chief Economist

TORONTO, Feb. 3 /CNW/ - Led by China and a number of emerging nations, the global recovery has achieved liftoff, according to the latest Economic Directions report released today by Scotia Economics, entitled Liftoff Achieved, But The Flight Path Will Be Turbulent.

"The U.S. and other developed economies should become fully airborne in the months ahead, fuelled by unprecedented monetary and fiscal stimulus set in motion in 2009, the revival of consumer spending and the re-ignition of production as firms react to improving sales prospects," said Warren Jestin, Chief Economist, Scotiabank. "However, a legacy of high unemployment and structural weakness in key sectors such as housing and financial services points to a bumpy ride during 2010 and a relatively low-altitude global growth trajectory into the next decade."

Domestic economic conditions have been more resilient in Canada than in the U.S., in large part because of the world-class strength of our financial sector and relatively stronger household, corporate and government balance sheets. Canada experienced only about half the rate of job loss recorded south of the border during the downturn and has led the U.S. in a return to job creation.

"These factors have supported a rebound in consumer spending and the revival of Canada's housing market, where buyers have been taking advantage of historically low interest rates at a time when U.S. residential activity is still mired in recession," commented Mr. Jestin.

According to the report, the pathways from recession to recovery vary significantly between Canada and the U.S., but both nations are benefitting as public infrastructure projects get underway.

"While there is a risk of economic relapse as governments begin unwinding unprecedented monetary and fiscal support, the broadening of global growth across sectors and regions should sustain the recovery through 2010," said Mr. Jestin. "In Canada and the U.S., however, this year's growth will do little more than backfill the hole created by the steep decline in activity during 2008-09. Even this modest performance will compare favourably with trends in Europe and Japan, where economic retrenchment has been much deeper and the timetable for regaining lost GDP will stretch beyond 2010."

With developed nations locked on a relatively low growth trajectory, China and other fast-growing emerging markets will provide a large share of global locomotion. In a year when global output shrank by over two per cent, China grew by nearly nine per cent in 2009.

Even with inflation held back by lingering excess capacity in a wide range of industries, interest rates will rise in the second half of 2010 as central banks begin easing up on the monetary accelerator, with the U.S. Federal Reserve and the Bank of Canada likely to raise rates two percentage points or more by mid-2011.

The Canadian Economy - Adjusting To New World Realities

The report also states that Canada is on the road to recovery, but that road is not taking us back to the world that existed before the sub-prime crisis began. Canadian governments entered the recession in much better fiscal shape than our main trading partners - an important strategic advantage in dealing with the downturn. However, current deficits will be difficult to unwind, with spending cutbacks tough to implement and the revenue rebound constrained by relatively subdued economic growth.

"In this environment, there is little leeway to use public subsidies to insulate domestic business from the powerful forces reshaping the global economic landscape," added Mr. Jestin. "Governments cannot afford to use the auto bailout as a template for supporting industries in crisis nor do they have the prescience to use industrial policies to pick winners and losers.

"A winning public sector strategy involves establishing a competitive tax environment and a world-class urban infrastructure, both of which have been given significant attention in recent federal and provincial budgets," continued Mr. Jestin.

According to Mr. Jestin, as Canadian businesses confront tougher realities in traditional markets, they are beginning to find a world of opportunity in new ones. Demand from China and other emerging markets has already helped push commodity exports to roughly half of Canada's foreign sales. Rising incomes in these nations will underpin rapid growth in consumer spending, providing important new opportunities for Canadian businesses.

"Success in these and other markets will depend on identifying high value-added, skill-based Canadian products and services that can plug into global supply chains or take advantage of unique niche market opportunities," said Mr. Jestin. "Highly entrepreneurial small- and medium-sized businesses in these rapid-growth areas will likely be a key source of Canadian job creation over the next decade.

"For governments and many businesses, focussing scarce resources on familiar markets and industries, while ignoring or avoiding new and unfamiliar ones, is likely to be a losing strategy," concluded Mr. Jestin.

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

For further information: Warren Jestin, (416) 866-6136, warren_jestin@scotiacapital.com; or Robyn Harper, Public Affairs, (416) 933-1093, robyn_harper@scotiacapital.com

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