BY JOCK FINLAYSON
This summer marks the third anniversary of the economic recovery that began following the 2008 global financial crisis that descended upon much of the world in its wake. By any measure it has been a subdued economic rebound, particularly for many of the ‘advanced’ countries that belong to the Organization for Economic Cooperation and Development (OECD).
Although a few OECD countries, including Canada and the U.S., have seen output surpass the pre-recession peak, most have yet to re-attain their pre-2008 levels of gross domestic product. This is the situation in the U.K., Japan and most of continental Europe.
A little more than half way through 2012, the signs point to both a faltering global economy and a deteriorating near-term picture in North America. In recent weeks the Bank of Canada, the International Monetary Fund and a handful of private forecasters have all trimmed their economic projections for 2012 and 2013.
In the Eurozone – consisting of 17 European nations that have adopted a single currency and central bank –GDP growth is close to zero, reflecting positive but low growth in the ‘northern’ members like Germany, France and the Netherlands, offset by declining economic activity across ‘southern’ Europe. The U.K. – which is not part of the Eurozone – is also in or flirting with a double-dip recession.
A glance at the daily headlines shows the Eurozone mired in a serious economic crisis that features ever-widening performance gaps between ‘core’ and ‘peripheral’ members, inadequately capitalized banks, a drying up of credit, and sky-high government borrowing costs for countries like Spain, Italy, Greece and Portugal. As the peripheral European countries implement fiscal consolidation programs intended to reduce interest rates and enable their governments to access bond markets on tolerable terms, their economies are contracting. A number of these nations face difficult fiscal and economic adjustments that will stretch over several years. But in the short-term, the economic problems in Europe are sure to depress growth in the region and to act as an unwelcome headwind for the global economy as a whole.
Turning to the United States, the positive economic news that characterized the early months of the year has given way to a less promising scenario. While U.S. housing markets appear to be stabilizing and balance sheets are in good shape, job creation has decelerated and most readings of business and consumer confidence point to widespread pessimism. The number of Americans classified as ‘employed’ is still five million below where it stood in 2007, causing some economists to argue that the long-admired U.S. jobs engine has broken down. Canada, in contrast, has enjoyed a relatively healthy labour market, albeit employment growth has slowed noticeably in 2012.
Recently, the U.S. has seen both exports and manufacturing shipments take a hit, owing to the slump in Europe and a rise in the value of the dollar relative to many other currencies. Of particular concern, given that consumers drive 70% of economy-wide spending, is that June was the third consecutive month of falling retail sales. U.S. consumers remain cautious, and it’s not hard to understand why. Apart from a sluggish job market, American households have suffered a decline in their net worth, with median wealth – the wealth of the household in the middle of the wealth distribution – dropping by an astonishing 39% between 2007 and 2010. At the heart of this wealth shock was a steep fall in housing prices. Today, almost one-quarter of American homeowners with mortgages find themselves with ‘negative equity’ in what is their most important asset.
What about the emerging markets, whose growth arguably has been the main factor keeping the world economy afloat since 2007? Unfortunately, many of these economies are also losing momentum. Growth is slowing in China, India, and Russia, while in Brazil it appears to have stalled altogether. The expectation of less robust growth in the emerging economies is putting downward pressure on some commodity prices. Although emerging markets are destined to become increasingly important players in global production and consumption, they cannot offset the effects of economic stagnation, unfavourable demographics, and political and institutional dysfunction evident in many of the advanced nations.
All in all, it’s now prudent to scale back the outlook for Canada’s economy, as global risks and uncertainties intensify and the domestic factors – such as buoyant housing markets, solid job gains, and government-engineered fiscal stimulus – that have helped to support our economy since mid-2009 peter out or shift into reverse. In today’s world, Canada can count itself fortunate if it manages to eke out annual GDP gains of 2% over 2012-13.
Jock Finlayson is executive vice president of the Business Council of British Columbia. His column is distributed through www.troymedia.com.