 | | Kip Beckman
Principal Research Associate
Economic Services |
Soaring public deficits in Greece and many other countries in Europe has rendered policymakers helpless in their attempts to keep the global recovery on track. This has resulted in surging gold prices and volatile equity markets. In this environment, the best we can hope for is a scenario where Europe and the United States end up in a long period of anemic economic growth and chronic deflation. At worst, the global economy tumbles back into recession and equity markets collapse once again.
We do not adhere to this dark view of the world economy, which has gained in prominence ever since the crisis in Greece erupted a few months ago. While there are certainly serious downside risks at the present time, The Conference Board still expects the global economy to expand by around 3 per cent this year.
There are two major factors behind our thinking. First, about half of the current growth in the global economy is attributable to developments in emerging markets. At this point in time, Latin America remains on track to expand by a healthy 4.2 per cent this year. The Asia Pacific region (ex-Japan) is projected to grow by an even faster 8.3 per cent. These regions emerged from the 2008-09 recession in fairly good shape because their banking sectors generally stayed away from the risky investments in mortgage-backed securities that were popular among banks in many developed countries. Currently, most banks in Latin America and the Asia Pacific regions have fairly limited exposure to banks in the troubled southern EU countries. The other plus is that a lot of exports from Latin American and Asia Pacific countries are destined for other countries in their respective regions, a factor that will cushion the impact of weaker demand from EU countries.
There has been widespread speculation that the Chinese economy is set for a sharp pullback in economic activity as the government attempts to curtail property market speculation. These efforts have been successful as the number of real estate transactions have declined sharply recently and money and credit growth have also weakened considerably. A decline in China’s economic growth is inevitable and necessary but the government appears to be taking the necessary steps to avoid a hard landing. Recent consensus forecasts indicate that the Chinese economy will expand by around 10 per cent this year and 9.2 per cent in 2011 – down from the breakneck pace of 13 per cent in 2007 but still strong enough to keep the Asia Pacific region humming along.
The second factor that will help support then global economy in 2010 is the state of the U.S. economy. We expect real GDP to expand by 3.2 per cent this year and that the chances of a feared “double dip” recession are remote. While private sector job creation has been disappointing, both business and consumer confidence have held up well amid the financial market turmoil, incomes continue to improve and manufacturing activity remains on the upswing as does export demand. Ironically enough, the crisis in Europe could actually help U.S. economic prospects. Oil prices have declined sharply in recent weeks and the recent “flight to quality” on the part of foreign investors, which has seen demand for U.S. Treasuries soar, has actually kept a lid on potential interest rate increases.
It is also important to put the recent volatility in financial markets in perspective. The TED spread is used to assess the degree of fear in markets by examining the difference between the LIBOR, the rate that banks charge to lend funds to each other, and the 3 month U.S. Treasury bill rate, which is viewed as being risk free. At the height of the financial crisis in the fall of 2008, the spread stood at 450 basis points. The spread is currently 41 basis points, up from the 10 basis point spread in early March, but well below the difference that existed during the market panic 20 months ago.
The fact that the world economy will post modest growth this year, despite the negative developments in Europe, is good news for the Canadian economy. While real GDP growth will slow down from the 6.1 per cent surge in the first quarter, we expect growth for the year to range between 3-3.5 per cent.