A growth up-shift is underway. Really? Many think the exact opposite – novices and professionals alike see momentum in the global economy going the other way. The numbers seem to agree: perceptions are getting dimmer, GDP is losing oomph, and certain leading indicators aren’t reassuring. So, is the up-shift just a Canadian thing, or is it just a pipe dream?
Take a quick look around our economy, and it’s actually easier to find weakness. Housing markets have been in overdrive for years, and are now beginning to slide in major centres. The long view isn’t great either, given our poor demographic fundamentals. Considering that housing activity typically shows the way for the rest of the economy, this particular bellwether is not reassuring. Are the pessimists right?
Maybe – closely linked to housing activity is Canada’s consumer – a force that, when added up, accounts for about 60 per cent of the economy. Housing decisions aside, this economic army is largely tapped out, thanks to huge debt loads. The average Canadian is underwater to the tune of 176 per cent of their income, about the same level as it was in the US just ahead of the Great Recession. Then consider that interest rates are rising – each mortgage roll-over is a big threat to available monthly income. Layer on the aging of the population and the changing tastes and preferences it implies, and the picture dims further. Seems that it’ll be a long while before we see an up-shift in this particular space.
This sombre scene isn’t likely to inspire business investment – another significant chunk of our GDP. Domestic-centered enterprises have had a good ride in the post-recession period, but they have to be getting twitchy about deteriorating conditions in our home market. This kind of uncertainty usually breeds hesitation – a wait-and-see that brings weakness.
Key industrial sectors are also in a funk. Canada’s mighty oil and gas sector is reeling in the face of low world prices, and even lower domestic prices. Ample global supply and constrained export capacity have produced a domestic discount that is eating into margins and decimating sectoral investment. Given this sector’s importance in Canadian exports, there’s another slice of GDP that looks compromised. So where’s the up-shift?
Believe it or not, it’s in the remainder of the export sector. Over the past 18 years, a quiet transformation of trade has been underway. It’s no longer a secret that Canadian goods have been pouring in to fast-growing emerging markets, rising from 5 per cent to 13 per cent of our merchandise trade since 2000. What’s less known is the power of this differential growth to transform our overall economic potential.
Let’s face it, our traditional trading partners are dealing with the same restraints on future growth that we are. They may be big players, but their position in our export rankings – yes, even in the case of the US – is eroding at an increasing pace. Big emerging players like China and India – and the markets around them that are riding in their slipstreams – still have a lot of aggressive growth ahead, and are becoming a bigger part of Canada’s trading sphere.
Is it just displacement, or is there a broader story to tell? Assume the current trends continue – does it do anything for Canada’s long-term growth? Run the numbers forward, and the effects are actually quite staggering. As faster-growing portions of our export become a larger share of the total, they actually transform the overall growth story. How much? Well, it’s not a stretch to see GDP growth rise more-or-less permanently by as much as a full percentage point, driven mostly by the transformation of trade. That might not sound like a lot, but in long-run potential growth terms, it is a colossal shift, with very significant positive implications for our country’s future welfare. Key to achieving this is recognizing what’s coming our way, and creating the capacity – private investment, infrastructure, labour – to support it.
The bottom line?
Many of the economic signals coming our way are gloomy – and with global policy turmoil choking the airwaves, it’s easy to take the view of waiting it out. The danger is that the immediate blinds us from the underlying growth dynamic to the point that our reticence cheats us out of growth that’s already in the works.
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