Analysis

Winnipeg Free Press - ONLINE EDITION

Canada’s prospects depend on the U.S., Europe and Asia

By: Jock Finlayson

Posted: 01/15/2013 3:32 PM | Comments: 0

VANCOUVER — As Canadian consumers and businesses gear up for 2013, they should be anxiously watching developments in the United States, Europe and Asia. Canada’s prospects over the next 12 months depend heavily on how events unfold in these regions, which account for the lion’s share of international economic activity.

Europe: Collectively, the 17 nations that comprise the eurozone, with its common currency and single monetary policy, are in recession and remain vulnerable to further flare-ups of the banking and sovereign debt crises that have plagued the region for more than two years.

The biggest risks lie in Greece, Spain and Italy, which are all dealing with contracting economies and persistent worries over government debt. The United Kingdom, which is not part of the common currency but has extensive commercial linkages with the eurozone, is struggling to avoid a triple-dip recession. Since Europe as a whole drives more than one-fifth of global consumption, economic conditions there matter to other nations, including Canada.

Amid the gloom, there is some good news coming from the old continent. In particular, the European Central Bank’s commitment to keep interest rates low and to purchase the sovereign debts of stressed euro-zone member states has calmed financial markets. Painful but necessary policy reforms are being implemented across much of the region. And European leaders have made progress in moving toward a banking union.

To be sure, the economic and fiscal challenges in Europe are forbidding, and the region’s near-term growth outlook is poor.

At this point, however, the eurozone looks likely to limp through 2013 without unraveling or succumbing to a full-scale financial crisis.

United States: After notching up a real GDP gain of 2.2 per cent last year, the U.S. looks likely to stay in the slow lane for a little while yet, despite tangible improvements in the housing sector and a pick-up in the pace of job creation.

After an epic slump, housing prices have bottomed and are now climbing in many urban markets. Residential investment is on the rise, with housing starts on track to reach 900,000 this year — a trend that is buoying Canada’s lumber industry.

American households have taken steps to repair their once stretched balance sheets, aided by a central bank that has re-written the monetary policy rule-book by holding interest rates at rock bottom levels and providing vast amounts of liquidity to the financial system. The cost of money has never been lower for most American borrowers.

The U.S. economy, however, is battling headwinds stemming from weaker exports and an extreme form of political dysfunction in Washington. The 2012 election resolved little, returning President Barack Obama for a second term, but leaving an increasingly strident Republican Party in command of the House of Representatives while the Democrats retain a slim majority in the Senate.

Business and consumer confidence have taken a hit owing to concerns over the "fiscal cliff" and doubts about the future of U.S. tax and budgetary policy generally. Within the next two months, a bitterly divided Congress needs to raise Washington’s debt ceiling and appropriate the funds necessary to keep the federal government operating past March 31.

It’s far from clear how, or whether, Congress will come to grips with these issues. Eighteen months ago, the U.S. came perilously close to defaulting on the public debt because of political rancor and brinkmanship. Tellingly, the legislative branch of the U.S. government hasn’t been able to agree on and pass a complete budget for the past three years.

For 2013, the best guess is that U.S. economic growth will continue to hover around two per cent, but there is upside potential if current political and policy uncertainties dissipate over the course of the year.

Asia:The final piece of the external puzzle is Asia, home to 60 per cent of the world’s population. The last half of 2012 saw a drop in economic activity in Japan, coupled with slower growth in China, India and several other Asian markets. The new government that recently came to power in Tokyo has pledged to boost the economy through additional fiscal stimulus and monetary easing. In China the economic situation appears to have stabilized, lessening the likelihood of a "hard landing" scenario and prompting many forecasters to upgrade their growth projections for 2013-14. Several other East Asian economies, such as South Korean and Indonesia, are also expected to see stronger growth in the coming months.

Add it all up, and the global economy is set to expand by perhaps three per cent this year, little changed from 2012. Some positive momentum may build over the second half of the year as underlying economic conditions in the U.S. improve, China continues to gain traction, and Japan’s economy stops shrinking.

Still, Canada can’t count on getting much of an economic lift from "abroad" in 2013.

Jock Finlayson is executive vice president of the Business Council of British Columbia.

—Troy Media

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