Scotia economists warn of instability

(July 4, 2005) The global economy is facing increased risks that threaten continued growth, ranging from the high cost of oil to the disparate attitudes toward savings in Asia and the U.S., according to a report from Scotiabank.

For the past few years, the global economy has been growing rapidly, largely fuelled by China’s buildup of economic infrastructure and American consumer spending. Rapid growth has since been successfully transformed into more sustainable rates.

One shock to the system could come when Asia’s developing economies eventually allow their currencies to float against the U.S. dollar.

“The U.S. has increased political pressure on China to loosen its tight control of the yuan,” says Pablo Bréard, vice-president, international research, Scotiabank Group. “But it is not clear that the U.S. is sufficiently prepared to face the disruptions that may result once this currency, along with others in the region, is liberalized.”

Asian societies tend to have far greater savings rates than the U.S., where consumer debt continues to soar. A freely floating Chinese currency could introduce far more instability to global markets than the U.S. is bargaining for.

Other threats include the high price of energy, which serves as a tax on production and transportation of virtually every product.

“We have not yet experienced the full impact of the increased price of oil,” says Bréard. “For Canada, the impact of these higher prices is manageable, but in other countries, this may precipitate a closer examination of fundamental economic issues that need to be resolved.”

While Canada’s vast energy supplies and relative fiscal prudence may help cushion the blow these factors appear set to deliver, a global downturn will still make its mark on the economy.

In Europe, Bréard says much needed economic reforms face stiff opposition from the public. As elections draw nearer on the continent, politicians become more likely to abandon these reforms.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com