Buckle up for bumpy recovery: Scotia

By Steven Lamb | February 3, 2010 | Last updated on February 3, 2010
3 min read

The global economic recovery is in the works, but it will not be a smooth ride according to a report by Scotia Economics entitled Liftoff Achieved, But The Flight Path Will Be Turbulent.

The report repeats a now familiar refrain: the recovery has been led by high-growth emerging markets, most notably, China. The U.S. and other developed economies can expect to be in full recovery mode within months, thanks to monetary and fiscal stimulus.

“However, a legacy of high unemployment and structural weakness in key sectors such as housing and financial services points to a bumpy ride during 2010 and a relatively low-altitude global growth trajectory into the next decade,” says Warren Jestin, chief economist with Scotiabank.

In Canada, employment has held up relatively well, especially when compared to the U.S. But both economies appear to be back on track, according to Jestin, as infrastructure spending ramps up.

“The broadening of global growth across sectors and regions should sustain the recovery through 2010,” says Jestin. “In Canada and the U.S., however, this year’s growth will do little more than backfill the hole created by the steep decline in activity during 2008 [and] 2009.”

For some economies in Europe and Japan, the hole is much deeper and a recovery to pre-crisis GDP will not be seen before 2011.

Perhaps the greatest threat to this recovery is the end cost of the cure. While government spending is proving to be a palliative in developed economies, it is creating long-term debt burdens that must eventually be addressed.

The word recovery may be a little misleading. Yes, the Canadian economy will continue to grow, but the post-crisis reality will be quite different from the world we knew before “sub-prime” entered the collective consciousness.

Stimulus spending by multiple levels of government has left policymakers with few tools to further promote growth. Competing political pressures will force the government to choose between job growth and deficit reduction. Even if deficit reduction takes a back seat, it must eventually be addressed.

“Governments cannot afford to use the auto bailout as a template for supporting industries in crisis nor do they have the prescience to use industrial policies to pick winners and losers,” says Jestin. “A winning public sector strategy involves establishing a competitive tax environment and a world-class urban infrastructure, both of which have been given significant attention in recent federal and provincial budgets.”

On the business front, another winning strategy will be to look beyond traditional markets — especially the U.S. — and find new customers in high-growth emerging markets. The commodities sector has already shifted its focus from cross-border trade to trans-Pacific trade. Now the rest of the economy should follow suit.

“Success in these and other markets will depend on identifying high value-added, skill-based Canadian products and services that can plug into global supply chains or take advantage of unique niche market opportunities,” says Jestin. “Highly entrepreneurial small- and medium-sized businesses in these rapid-growth areas will likely be a key source of Canadian job creation over the next decade.


Steven Lamb