Managing the Mayhem

So…what’s your next move? Making decisions amid current economic and political conditions is a lot more challenging than usual. The high tide of populism makes elections trickier to predict. Policy actions and threats that call into question age-old axioms have made even near-horizon planning a perplexing task, to say the least. And with capacity pressures on the rise, interest rates are rising, a totally new paradigm for a significant slice of the population. Is it even possible to make sense of it all?

EDC Economics’ Global Economic Outlook, Fall 2018 has taken on this tough task. Our first observation is that despite the mayhem, the world economy is growing. In fact, growth is strong, and being powered principally by the U.S. economy. And it’s spreading – there is lots of evidence that this has spurred activity in Europe and is making its way into the emerging economies. The best news is that this growth is sustainable. While a growing chorus of analysts is disputing this, evidence of developed-world pent-up demand – a key ingredient for future growth – cannot be denied.

Growth is remarkable, given the global economy’s significant headwinds. Hesitation is one of the longer-standing concerns. Persistent sluggish growth in the post-recession years created an investment reticence that is still holding the economy back. Populism is creating uncertainty as it continues to challenge the status quo. One key tangible outcome of this political disruption is protectionism, manifest not only in threats but now in actual imposed tariffs. An agreement-in-principle on USMCA is a great relief, but overall, protectionism is still alive and well in other arenas – and with it, doubts that inhibit trade-related activities.

A more recent threat to growth is rising interest rates. The impact on the developed world will be more muted; after all, rate hikes are in place not to kill but to manage growth. The greater concern is the knock-on effect on emerging markets. For them, the long period of ultra-low rates is over. Those who gorged on cheap external credit are now faced with cost increases and instability. The first effects are obvious in Turkey and Argentina, but broader turbulence is expected, and is far from over.

So far, growth is winning out. Although there are potential disruptions, what is clear to date is that business is meeting market demand. As such, we see U.S. growth accelerating from 3 per cent this year to 3.3 per cent in 2019. The other global ‘engine’ economy, the EU, is set to have back-to-back years at just over 2 per cent, which is ahead of long-run potential. Emerging markets will collectively grow by 4.7 per cent in 2018, and down a shade next year to 4.6 per cent as China eases marginally. On balance, global growth holds the line at 3.2 per cent this year and next.

Still, the headwinds are having an effect on the outlook. First, uncertainty on the trade policy front is undoubtedly creating an ‘investment-hesitation’, and at a precarious moment: growth and looming capacity constraints are crying out for increased physical investment on plant and equipment. Second, higher interest rates are a reality that a whole generation has never had to deal with. Adjustment will be hard enough in developed markets, but larger swings in the emerging world, already in process, will be with us for some time to come, creating instability. Managing through these issues will be a near-term strategic imperative.

Canada is capitalizing on the good times. Commodity prices are generally stable. Interest rates will continue rising, but at a slower pace than in the United States. As such, we expect a stable currency that rises modestly through next year. This, together with solid global growth will see Canada’s exports rise by 6 per cent this year and 4 per cent in 2019.

All things considered, strong, steady growth is the dominant theme in the global outlook. We can only imagine what it would be without the headwinds – and what it will be now that a key headwind has died down. For now, it’s important to develop a strategy that deals with – and where possible, leverages – the remaining headwinds.