Weathering the Weather

(Export Development Canada – Peter G. Hall)

Looking out the window isn’t much fun these days. It’s mighty stormy in the global economy, and every day seems a bit wilder. Getting a read on any storm is always tough at ground zero. But even the satellite scan is hard to interpret in today’s super-storm. What does the forecast call for?

Current turbulence was a long time in the making. Like overheated oceans that breed multiple cyclones, overheating in the economy has created multiple economic storms. The first big one was the collapse of U.S. housing markets in mid-2006. Broader weakening of the U.S. economy came next, followed closely by the related market turmoil that has embroiled the world’s financial institutions. Now, economic weakness is scudding across the globe, and the full effects lie ahead.

Economic signals suggest that better weather is still a long way off. Working off the excesses in the U.S. housing market could take another 18 months, let alone similar excesses in European markets. The IMF judges that we are at about the halfway point of the financial market debacle. Emerging markets are only just starting to feel the global storm’s effects, which will cool growth from the torrid pace of recent years. Global recovery won’t likely begin before early 2010.

The wild weather will hit 2009 hardest. Key economies are on the verge of recession, and worries about further-flung effects are mounting. EDC Economics’ Fall 2008 forecast sees world growth close to the IMF’s global recession tipping-point, at just 3.3% in 2009. That follows 3.8% this year, and close to 5% annually from 2004-07. Industrial countries will bear the brunt of the storm. Collectively, they will see just 1.2% growth, but performance could easily be a lot weaker.

Conditions have already deteriorated in Canada. In spite of strong domestic activity, a 5% drop in exports will reduce bottom-line growth to a very slim 0.9% this year. Growth will edge up slightly to 1.4% in 2009, but it will likely feel worse. Weakness will spill over into the domestic economy, while exports continue to slide, albeit more mildly. Not a pretty picture.

But things could be much worse, given U.S. weakness. Certain exporters, including the forestry, consumer goods and auto sectors, can tell a much bleaker story. Even so, exporters will get a timely boost from the sharply lower Canadian dollar, which may well undershoot our US $0.87 target. Key investments and a dose of good luck will help other sectors. Six new model lines will shore up auto exports in 2009, and Canada’s sought-after aerospace products will see solid growth. Add in growth of agri-food, energy and fertilizer shipments, and the story is far less grim.

Despite the storms, export opportunities are still manifold. Many emerging markets used the good times to clean up fiscal and monetary policy, and have stored up commodity windfalls for times like these. Sure, growth will slow, but will still well outperform the global average. And this will enable key infrastructure projects, mostly in emerging markets, to continue through difficult times.

The bottom line? Weathering the weather can mean cowering in the bunker and waiting the storm out. It can also mean searching for creative paths through the storm, perhaps in non-traditional routes. Those who do are likely to survive and thrive in the worst of times, and well beyond.