Recovery will reshape the world: Scotia

Chalk one up for John Maynard Keynes. Massive government stimulus has had the desired result, spurring economic growth around the world and ending The Great Recession of 2008-2009, according to an economic report from Scotiabank.

The world’s largest centrally planned economy, China, is set to lead the global recovery, with the U.S. — home to $2 trillion in federal stimulus alone — set to lead the industrialized world.

“[U.S.] government initiatives are bolstering disposable income and spending at a time when households are focusing on reducing debt and rebuilding savings,” says Warren Jestin, chief economist, Scotiabank.

“Monthly job losses appear to have crested and confidence surveys suggest that consumers and businesses are becoming less negative about current conditions and cautiously more optimistic about prospects for the balance of the year,” he continued.

By encouraging consumers to keep spending, governments helped to drive retail inventory depletion, especially in the auto sector, which had already drastically cut production. The U.S. “Cash for Clunkers” program quickly emptied car lots across the country. Automakers are now restarting idled production lines to rebuild dealer inventory.

The U.S. housing market, which was at the centre of the economic storm, has also started to turn around, but Jestin suggests prices will remain low due to the large number of houses on the market.

But despite strong growth anticipated for the U.S., he says that 2010 will do little more than fill in the economic crater left by the recession.

“It will take longer to reverse the 22% drop in U.S. household net worth since mid-2007, to revitalize housing and to restructure the financial services and motor vehicle industries,” Jestin says.

The recovery will be no faster in Europe, even though most economies there suffered much smaller declines than the U.S. The real drivers of growth will be in the emerging markets, where India and China are seen increasing their output by between 6% and 8%.

Canada “dragged” down Among developed economies, Canada is seen recovering on the back of the emerging markets, as it was their initial decline that drove the domestic economy into recession. But the recovery should be helped along by the relative strength of the banking system and federal balance sheet.

Read Scotia’s report: As The World Turns.

“Our nation was dragged fully into the global recession only when faltering emerging economies triggered a collapse in resource prices and export earnings,” says Jestin. “Even then, the erosion in employment, housing activity and car sales has been less severe than south of the border.”

While the recession itself was short, the impact it had on the global economic structure could prove to be nothing short of a revolution. With post-industrial nations forced to unwind highly leveraged economies and overhaul their banking systems, the largest emerging economies will be in the driver’s seat.

The industrial and investment decisions made by China, India, Brazil and other emerging powerhouses, will shape global trade patterns, dictate commodity prices and have an impact on financial markets.

Their hunger for resources will drive the Canadian dollar “to parity and beyond” versus the U.S. dollar, eliminating one of Canada’s traditional competitive advantages.

“Canadian governments have limited resources and a long ‘to do’ list that includes fully implementing the proposed plan for a more competitive corporate tax structure, returning to fiscal balance and investing in big-ticket transportation, power and communications projects,” Jestin says. “Among the many competing priorities, however, education and skills training should be right at the top of the list because work force quality is one area where we must be able to compete with the best.”

Sentiment improving In the short term, Canadian sentiment is rising among small business owners, according to the latest business confidence survey conducted by the Canadian Federation of Independent Business (CFIB). The survey’s Business Barometer has hit a two-year high of 65.4.

“These results demonstrate an overall improvement across industries and regions, suggesting that the economy is finally making its first tentative steps toward recovery,” says Ted Mallett, CFIB’s vice-president of research and chief economist. “Thanks in large part to a return of confidence in Ontario and Quebec, optimism is firming up throughout the economy.”

Any reading above 50 indicates that the majority of business owners expect stronger performance in the coming year. In past periods of economic growth, the reading tends to hover between 65 and 75.

This confidence is not evenly spread throughout the economy, however. The greatest confidence level was found in the arts and recreation sector (69.9) and the professional and business services sector (67.8). Most sectors ranged in the low 60s, but the lowest confidence levels were in agriculture (42.4) and transportation (43.8).

Geographically, the highest readings came from Saskatchewan (68.6) and Ontario (66.3), and the lowest readings from Prince Edward Island (58.9) and Alberta (59.5).

The August 2009 findings are based on 998 responses, collected from a stratified random sample of CFIB members. Data are considered accurate to +/- 3.1%, 19 times in 20.

(09/02/09)