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In Search of an Economic Engine

Three working days into the New Year and it’s back to reality: bills to pay, an overstuffed inbox to deal with and more of the same scary world news we tried to forget over the holidays. Did the multitude of happy wishes for 2012 instil hope, or do they ring hollow as we contemplate what may lie ahead?

Without a doubt, there are risks aplenty. Europe’s colossal fiscal challenges will continue to test market patience. Tighter liquidity is an additional threat. Mid-East instability is not ebbing. Even the mighty BRICS are slowing. Shaky ground, especially if any 2011-style shocks recur.

Sobering stuff, but is this the complete picture? In many ways, 2012 is beginning much as 2011 did. Like this year, the risk-list was daunting, but a significant build-up of momentum gave hope that we were well on the way to recovery. Volatile politics and a litany of natural disasters snuffed out the momentum and delayed recovery. Now, we’re at a crossroads, in the words of the IMF, a ‘dangerous juncture’. Will momentum resume, or do we face tepid growth that exacerbates lingering risks?

The global economy is in dire need of an engine, one that will engage with the strength to pull along the considerable line of risk-laden boxcars to destination recovery. We can count Europe out. Japan’s size makes it a candidate, but its structural difficulties relegate it to also-ran. Emerging markets have been touted by many as having the capacity to pull the rest of the world along – but dependence on external conditions suggests that for all their size, they still lack the depth to power up world growth.

What of the US economy? It’s really the only remaining candidate, but a sovereign debt downgrade, failure of the supercommittee to agree to fiscal measures, twin deficits, unfunded health care and pension liabilities and municipal governments at the brink of bankruptcy, together suggest another boxcar. US consumers seem to agree – confidence remains stuck at recessionary levels.

Funny thing – the real side of the US economy does not seem to care. Thumbing its nose at the gloom, US housing markets are beginning to get back on their feet. Temporary interruptions halted the work-down of surplus housing units, but in the past couple of months, about a million units were absorbed, this time without any special incentives, and now there are just 4 million to go – balance is being restored. US consumers are spending again – sales gained momentum late in 2011. Even auto sales are rising. And the job market is brightening: the number of new UI claimants is falling steadily.

Business flows seem to agree. Industrial production is on a strong up-trend. With new orders coming in at a double-digit pace, further production gains are quite likely in the coming months. This is soaking up spare production capacity across industries, suggesting that the mountain of cash corporations are sitting on may soon need to be spent on new machinery and plant space. Growth also suggests that hiring activity is in for a near-term boost. If this sounds surprising, perhaps it’s a comment on the perverse appeal of negative news and its ability to mask positive reality.

The bottom line?

 In a rail yard cluttered with immobilized boxcars, an engine is quietly revving up, one that has the capacity to pull the global economy forward to its long-sought recovery. Canada’s proximity to the engine suggests that our exporters will be among the first to lurch forward.

This commentary is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. Neither EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.