Emerging markets take the wheel

The global economic landscape will change significantly in the next 10 years and major emerging markets will account for over 55% of global output by 2020, says Paul Jenkins, senior deputy governor of the Bank of Canada.

He was speaking at a forum titled “Beyond Recovery: Sustaining Economic Growth”, organised by the Economic Club of Canada. Jenkins discussed the changing global economic landscape and the opportunities and challenges it will pose for Canadian business.

“In the wake of the global economic financial crisis and the ‘Great Recession,’ economic recovery is under way, supported by exceptional monetary and fiscal stimulus,” says Jenkins.

The return to full resource utilization in many countries, however, will be protracted given the need to repair the balance sheets of households and financial institutions.

He forecast major changes in the global economic landscape in the coming decade. “Consumer demand will be a relatively less important source of growth in the U.S.,” he said. “China, on the other hand, will need to rely more on domestic demand as the engine of growth.”

Global trade imbalances formed a significant component of the financial crisis and must be dealt with rotation of global demand, he says. “Without this rotation of demand, resources will not be fully utilized, and global economic growth will be neither as strong, nor as sustained, as it could be,” says Jenkins.

One of the powerful forces changing the economic landscape, he says, is the difference in the growth rates of potential output — the rate of growth that can be sustained over time without inflationary or deflationary consequences.

The growth rate of potential output for the major industrial economies is estimated to be between 2% and 2.5%, while for the major emerging markets it is between 5% and 8%.

“Much of this difference can be attributed to the fact that emerging-market economies have ‘catching up’ to do — by combining labour and more intensive use of capital in production — and to the fact that they have a large and growing pool of labour to draw upon,” says Jenkins adding that these economies will create 55% of the global output by 2020, up from 45% today.

Jenkins says one of the most important tasks for public policymakers is to remove uncertainties and restore trust in financial markets. “Trust is needed if financial markets are to price assets correctly and allocate capital efficiently.”

Private sector demand must replace public support as the engine that drives sustained economic growth, he says detailing what the new global landscape means for Canadian business.

The new economic order will bring many opportunities and challenges. Canada’s export sector is already dealing with a strong Canadian dollar, intense competition from emerging economies and the shift in global demand from advanced economies to emerging-market economies. An important issue facing Canadian business is how best to deal with the opportunities and challenges posed by the dynamic emerging market economies.

“The strong demand in these countries for materials, finished products, and services — ranging from legal to financial and educational services — presents tremendous opportunities for Canadian business,” says Jenkins.

These opportunities include developing innovative products and services, working with new partners, and optimizing the mix of global and domestic activities, says Jenkins.

While such measures will benefit everyone, they will require an active engagement with new markets. “Make no mistake, to recognize the potential growth of these markets is to recognize the rising purchasing power of these countries and their citizens,” says Jenkins.

Canadian companies, he says, are shifting gears and are entering emerging markets with strategic, long-term initiatives. This opportunity comes with many challenges that affect all facets of Canadian business. They come in the form of “acquiring, developing, and training the right people, applying technology to enhance research and operational work.”

Jenkins stresses the importance of investment in modern, productivity-enhancing equipment and structure, which are critical to meeting new challenges and opportunities.

“Our track record in this regard has not been very impressive, even adjusting for the cyclical factors and uncertainty of the past two and a half years,” said Jenkins. “Compared with previous decades, productivity growth has weakened substantially in the past ten years.”

He partly blames “capital deepening” — the capital with which workers are equipped — for this poor performance. Another problem area: “Capital investment is not always well integrated into the workplace.” He says it is imperative that firms in Canada make concerted efforts to boost productivity.

(03/30/10)