Forecasters Are Sharpening Their Pencils

(Video: Bloomberg TV • Story: Export Development Canada)

It is the forecaster’s prerogative to revise the outlook. And whether it’s the weather, a flight arrival or the economy, the closer we are to the event, the clearer the forecast becomes. Recent turmoil has prompted sizable changes to the near-term economic outlook. What are pundits now saying?

At the beginning of last year, forecasters were quite bullish about prospects for 2008. The world’s largest economies, together accounting for half of global output, were expected to average growth of 2.5%, roughly in line with long-run trend performance. One year later, the outlook was scaled back to 1.9%, and by mid-2008 was trimmed further to just 1.5%. By any standard, that’s a pretty dramatic revision, putting certain economies at or close to recession levels. Will forecasts be downgraded further? Not likely. The 2008 cake is getting more firmly baked; the year is half over, and barring a substantial surprise, what the prophets now see is probably what we’ll get.

Sights have turned to 2009, and what is unfolding is more disquieting. Back in January, the seers were optimistic that prospects in the big economies would improve, collectively predicting growth would accelerate to 2.3%. Since then, revisions have been fast and furious. The 2009 forecast has been reduced by as much as the 2008 forecast was, but in just one-third of the time. At present, large-economy growth is pegged at just 1.3%, now a shade lower than the call for 2008.

Changed prospects for the US economy have played a big role in the overall revisions. Following a weak first quarter, the average projection was chopped by 1.2% to a meagre 1.5%. But the US is not alone; UK growth was halved to just 1%, Spain’s outlook fell from 2.4% to just 1.1%, and Ireland suffered a larger-than-average reduction. All of the large Western economies participated in the downward revision, and most are facing slower prospects in 2009 than at present.

Canada is a rare exception to the rule. On average, forecasters believe that, after a sluggish 2008, growth will nearly double next year. EDC Economics’ Summer 2008 Global Export Forecast sees Canadian economic growth of 1.1% this year and 2% in 2009, as exports stabilize and domestic demand remains firm. Low activity levels will keep exporters on their toes in 2009, but a slightly weaker Canadian dollar will provide some relief.

What about the rest of the world? Other industrialized countries are generally expected to see growth slow in 2009 as well. The trend is also affecting emerging markets. Following torrid growth just under 12% in 2007, China’s growth slowed to 10.1% in the second quarter of this year. Reactions to rising inflation, a deteriorating current account and fiscal concerns threaten India’s near term outlook. In addition, South America saw first quarter growth weaken, owing to tighter monetary policy, currency appreciation and softer trade performance. In fact, economies that are not sharing in the slowing trend are in rare company.

The bottom line? A slim minority just a year ago, those who believe that the slowdown is truly global have become a large majority in the forecasting community. And most have also swung over to the view that the recovery isn’t imminent. Under these circumstances, exporters should brace for lean times and be selective about near term international ventures.