Significant hurdles before real economic growth begins in 2011, says EDC

HALIFAX , Oct. 27 /CNW/ - Canada's exports are forecast to rise by 6 per cent in 2010, but a number of challenges to real growth remain ahead, according to a Global Export Forecast released today by Export Development Canada (EDC).

"Growth has returned to the global economy, and recovery-talk is everywhere. There's an obvious sense of relief that world output is no longer in freefall, but there's a big difference between renewed growth and rock-solid recovery," said Peter Hall , Chief Economist for EDC. "There are still big hurdles to clear before we'll see the big boost that recoveries typically bring".

"Financial markets are also up against a sizable hurdle. Rising unemployment rates are pushing defaults upward, testing the mettle of Western financial institutions once again," added Mr. Hall . "In addition, international trade, a key engine of the world economy, faces rising protectionist rhetoric. Inflation fears are a further hurdle on the path to recovery. And a key hurdle for Canadian exporters is the stubbornly high loonie."

Mr. Hall also said that "to top it off, the swollen excesses of the boom years are still being worked off and still have a way to go before balance is restored. At that point, we'll see the beginnings of a true recovery. But that point is still at least six months down the road."

In the U.S., the negative impact on household balance sheets is still being worked off, and monetary and fiscal stimulus will need to be unwound at some point. At the same time, credit markets remain tight due to rising bankruptcies and consumer credit delinquency caused by the recession and subsequent layoffs. Consumer incentive programs like "cash for clunkers" and tax credits for first-time home buyers still have yet to prove they can generate any significant momentum. EDC expects the U.S. economy to contract by 2.5 per cent this year and expand by 2.1 per cent in 2010, fuelled primarily by net trade, government spending and the re-building of depleted inventories.

Canada's exports have suffered greatly under the global slowdown, with this year's 24 per cent drop representing the largest single year decline on record. A dramatic fall in exports translates into lower business investment, higher unemployment and a weaker domestic economy. Fiscal stimulus has already been evident in 2009 and will continue into 2010, providing further offset to weak U.S. demand. This year the Canadian economy overall will contract by 2 per cent, before positive external demand and fiscal stimulus lift real activity 1.9 per cent in 2010.

"Accommodative monetary policy and the health of the Canadian banking sector have combined to reduce the impact of the credit crisis on Canadians, and the absence of a housing bubble means that Canada will enjoy a relatively robust residential housing market in 2009," said Mr. Hall .

EDC analysis of global fundamentals suggests that the Canadian dollar should average closer to 86 cents against the U.S. dollar through 2010 as reality returns to commodity markets and prices begin to reflect underlying supply-demand fundamentals, with modest gains expected in crude oil and base metal prices.

"What we're seeing with the higher Canadian dollar right now is a strong speculative influence, not a fundamental shift. If investors remain bullish on commodities like oil and copper, and commodity-currencies, this could drive the value of the loonie higher, with devastating effects not only to the Canadian exporter, but to the recovery itself," Mr. Hall explained.

"Having reviewed the numbers, a persistently high Canadian dollar through 2010, in the 95 cent plus range, could shave as much as 2 to 3 per cent from Canada's GDP," Mr. Hall surmised.

Energy exports will be the primary drag on total exports this year, as technological advances in the natural gas market result in a shift in the fundamental demand-supply balance, and U.S.-demand for crude oil remains extremely weak. Energy exports will grow by 9 per cent next year, however the recovery will largely be price-driven. EDC is forecasting the price of crude to fall from an average USD 100 /brl in 2008 to USD 57 /brl in 2009 before rising to an expected average USD 60 /brl in 2010.

The dramatic 33 per cent fall in exports of ores and metals this year reflects both the collapse in developed market industrial production as well as the bursting of the commodity-price bubble. A real recovery for the sector will occur only when the U.S. and European markets come back next year, with forecast growth of 11 per cent. A notable downside risk for next year's growth is the Buy American provision in the U.S. fiscal stimulus plan.

"At the very core, the recovery will begin with a more optimistic U.S. consumer," concluded Mr. Hall .

EDC's semi-annual Global Export Forecast addresses the latest global export conditions including perspectives on interest rates, exchange rates as well as export strategies to help Canadian companies minimize risk. It also analyzes a range of risks for which exporters should be prepared. The Forecast is available on EDC's website at http://www.edc.ca/gef.

EDC is Canada's export credit agency, offering innovative commercial solutions to help Canadian exporters and investors expand their international business. EDC's knowledge and partnerships are used by more than 8,300 Canadian companies and their global customers in up to 200 markets worldwide each year. EDC is financially self-sustaining, a recognized leader in financial reporting and economic analysis, and has been recognized as one of Canada's Top 100 Employers for nine consecutive years.

For further information: Media contact: Phil Taylor, Export Development Canada, Tel: [phone], Blackberry: [email protected]