Export Development Canada

Export Development Canada

April 27, 2010 12:05 ET

Economy in Critical Zone, Threats to Recovery Remain Says EDC Forecast

TORONTO, ONTARIO--(Marketwire - April 27, 2010) - Canada's exports are forecast to rise by 11 per cent in 2010 as they begin to rebound from the worst year on recent record, but a number of threats remain before world demand moves beyond the critical zone, according to the Global Export Forecast released today by Export Development Canada (EDC). 

EDC's forecast also called for Canada's exports to grow by seven per cent in 2011, when it believes true, sustainable growth will begin.

"Despite over a year of proclamations to the contrary, global recovery remains elusive," said Peter Hall, Chief Economist at EDC.

"It's true that growth has resumed, and some of the movement is eye-catching. But there is a big difference between the end of recession and the start of recovery. Genuine recovery requires a much more sustained, aggressive growth pace than we have experienced to date, and much higher levels of activity than we currently see. We may have recovery in our sights, but we're not quite there."

EDC's forecast noted that while some of the current growth numbers are positive, they are supported by a heavy dose of public stimulus. The value of total developed-economy stimulus spending is worth nearly four per cent of OECD GDP, a significant impact when compared with average annual growth in these economies.

"Essentially, stimulus is buying time until the true recovery kicks in," said Mr. Hall. "Are we almost there? We won't arrive until the enormous excesses that piled up at the end of the boom period are worked down. The good news is that the work-down has been steady and aggressive. The bad news is that we'll have to wait until year-end before market balance leads to a typical resurgence of key economic drivers."

EDC believes that there are four key risks to the economy as it makes its way through recovery towards sustainable growth. 

  • Fiscal stimulus: This poses a problem to the economy because it will soon stop contributing to bottom-line growth, taking many by surprise. If this causes overall growth to falter ahead of the underlying recovery, a resurgence of uncertainty could harm overall growth.

  • Financial markets: Extraordinary measures successfully rescued Western financial institutions following their near-collapse late in 2008, but they still face one more test. Loan defaults are now hitting peak levels, lagging behind the economic cycle as they historically tend to do. Weathering this phase of the cycle well is critical for the sector, and for the overall economic outlook.

  • Soaring commodity prices: Crude oil and base metals prices have seen very strong growth recently, but the price increase has been accompanied by high and still-rising inventory levels, surplus productive capacity, and low aggregate demand. EDC expects an orderly softening in prices, but there is danger that a sharper correction could test overall confidence.

  • Inflation: It has become an increasingly prominent worry in recent weeks, and EDC's forecast reports that high unemployment and generally low capacity utilization suggest that core inflation pressures will remain weak for some time, even if growth accelerates rapidly. The forecast also noted that the monetary policy challenge will be to unwind stimulus in a way that doesn't upset current growth before sustainable recovery occurs.

"These risks promise to keep the caution level in the economy high enough that challenges are likely to be managed swiftly and with the same coordination that has made recent measures so effective," Mr. Hall said.

Accordingly, EDC forecasts that world growth is likely to reach 3.7 per cent this year, a vast improvement over the 1.1 per cent contraction in 2009, but still not enough to be called a true recovery. Further improvements in fundamentals will lead to an expected 4.2 per cent expansion in 2011. EDC forecasts that developed economies will be well shy of the average this year but will gain ground in 2011, while emerging markets promise faster and steadier growth.

EDC's expects Canada's growth to rise by 2.5 per cent this year and 2.9 per cent in 2011, following a decline of 2.6 per cent in 2009. EDC believes export growth will be stronger, and certain industries like the auto sector will post double-digit gains. However, even for the faster-growth sectors, activity levels will still be well below previous peak activity by year-end.

"The recession pummeled Canadian exporters, but once recovery sets in, growth will rise sharply until the economy returns to normal production levels. That period is in sight, and if we manage well through the critical zone, our next big challenge will be accommodating that aggressive growth," added 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 8,400 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.

Contact Information

  • Export Development Canada
    Phil Taylor
    Blackberry: ptaylor@edc.ca