CSCB Daily Articles: Decision Time!

Confusion seems to be hitting an apex. Political uncertainty is rife. Following a long run of disturbing natural events, this year’s storm season in the mid-Atlantic hit Biblical proportions. Then there are the structural weaknesses, a more-or-less permanent monument to the Great Recession – and the related sluggish growth, with which restless populations the world over are all too familiar. To make matters worse, there is a rising chorus of economists who believe we are on the verge of recession. If we’re really this shaky, how could it possibly be decision time?

Economists believe it’s decision time for policymakers. At their conferences, the hot topics are a lineup of today’s structural woes, and how to deal with them: fixes for the banking sector; fixes for fiscal policy; how to unwind (fix) extraordinary monetary stimulus; how to assess and address the economic effects of climate change; and how to make growth more inclusive. These are all key, relevant issues, and the proposals to address them, clever and noble. But they seem to universally appeal to a basic thread: that our long run of sluggish growth is our new, and absent a brilliant, original policy change, unending reality.

Regular folk have grown weary of waiting for the magic wand – just when it seems to be staring us in the face. No, it’s not an out-of-box policy solution. It’s an economic reality that has either been forgotten, or dismissed as dead: the business cycle. Slow post-recession growth might look permanent, but it was preceded by all the regular elements of the economy’s natural cycle: recovery, growth phase, peak and recession. What frustrates analysts is the absence of true recovery this time. But it’s not really absent, just delayed. Why? Well, it seems that globalization has stretched out the business cycle. Last time around, it produced a longer long, a higher high, and clearly a lower low. And a protracted recovery period.

If this is true, then the next phase isn’t recession; quite the opposite, it’s true recovery. And if that phase is here, there should be supporting evidence. Consider this first fact: after years of consistently revising forecasts downward, key international institutions have recently revised projections upward. A second development is the inclusion of workers – notably millennials – who until recently, were the casualty of meager global growth. A third occurrence is a notable improvement in key leading indicators. A critical fourth element is evidence of pent-up demand – both at the consumer level, which has been held back by a post-crisis neo-prudence, and at the business level, where investment has been on hold for a decade.

These developments and others have led us to remain upbeat in EDC’s latest Global Economic Outlook. Leading the charge is the vibrant US economy, forecast to rise 2.7 per cent in 2018 following this year’s 2.2 per cent performance. The European Union is projected to maintain growth above its long-term potential, rising 2.2 per cent this year and 1.9 per cent in 2018, with a ‘risk’ that growth will actually be higher. Increasingly, this developed-market growth is expected to spill into the emerging world, and there are already nascent signs of uptake. Our forecast calls for emerging markets to post 4.7 per cent growth for 2017, with next year reaching 4.9 per cent. Notably, India is taking the lead.

Increased momentum has generally favoured the outlook at the industry level. In the commodity space, which has been wracked by the mid-2014 price plunge, tightening growth has not only put a solid floor under prices, but has given them some recent – and needed – lift. An investment revival will not only benefit the construction industry, but also producers of machinery and equipment. The auto sector, already booming, is expected to continue at a high level.

Improved world growth has led to another key change: higher interest rates. Many think of this as an economy-killing, recession-inducing move. Not at this phase of the cycle; rate hikes are actually meant to keep the expansion orderly, and if you like are one of today’s clearest signals of true recovery.

The bottom line? If true recovery really is here, then now is decision time. After a long lull, time to make that key new investment. Time to make that foray into a new foreign market. Time to lock in financing before it gets more expensive. And time to move before everyone else catches on.

This was written by Peter G. Hall, EDC Vice President and Chief Economist.

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