(October 27, 2003) Business leaders should ignore the naysayers and embrace the so-called challenges facing the export industry, according to Stephen Poloz, vice-president and chief economist at Export Development Canada.
“The world is offering three gifts that are unique in history to Canadian companies,” he says. “The real question is what will we do with them.”
The first “gift” he says is that next year is expected to be the first synchronized global expansion since 1996.
“If everybody’s growing at the same time, they tend to feed off one another — trade expands, global investment expands, international risks go down so investment gets out into the places where most of the money can be made,” Poloz says. “All those good things happen when we’re in that sweet spot, when everybody’s synchronized.”
He says that this is especially important to a trading nation like Canada, but that we also have the most to gain from these conditions.
Canada has suffered declining exports for the past three years, which Poloz says is unprecedented. If it were not for the high price of energy exports, 2003 could have seen even lower export values, as other sectors suffered. He says that non-energy exports should grow by 7% next year as the world economy stabilizes, setting Canada back on a positive trajectory.
Poloz says the second “gift” offered to Canadian business is the emergence of China’s economy, comparing it to the emergence of the U.S. as a “real economy” in the 1860s. He says most European countries made the mistake of trying to compete with the U.S., resulting in the Victorian depression of the 1870s.
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“People who try to compete with China right now will go into their own depression,” he says. “You can’t compete with someone who can do something for 25% of the cost.”
The lesson to be learned is that Canada should embrace China, rather than try to compete. Poloz gives the example of the tool and die industry, where a die can be made in Asia or Eastern Europe for a fraction of the cost of a North American-made die.
The third “gift” Canada has been given is the elevated value of the dollar. Poloz admits this runs contrary to conventional wisdom, he relates it to the second gift.
“If the world’s going back to normal by next year, that’s because it’s been abnormal since 1997,” he says. “Normal is where we were back in 1994 to 1996, and the dollar was about 74 cents then. So we are very close to normal exchange rates again.”
Canadian companies are expected to invest $90 billion in equipment updates in 2004. Poloz says that 90% of this equipment will be imported and that the 76-cent loonie represents a 10% discount on much of this equipment and that partnership in China now costs 20% less.
Poloz says the argument that a rising dollar makes Canadian products more expensive to foreign buyers is false, because exports are usually priced in U.S. dollars anyway. The only downside comes in the profit margins for the exporter, which can lower its costs of production through outsourcing anyway.
He also says that the rising dollar is a sign of an improving world economy, pointing out that far too often economists decrying the rising dollar qualify their arguments with “all things being equal,” assuming the rise occurs in a vacuum.
Poloz predicts 3.9% global growth for 2004, which he says is similar to the growth rate in 2000, but that it will be more properly distributed, since U.S. was excessive in the dot-com heyday.
In 2004 the world will be led by non-Japan Asia, where growth should hit 6%. This will be a more balanced distribution, since Asia makes up 25% of the world economy, making it more important to the global picture than the U.S.
Western Europe will be relatively sluggish, but Poloz says that at 2% growth, the region will not be dragging the world down. The real growth in Europe will be in the east, where lower production costs will attract manufacturing investment.
The U.S. and Mexico should see 4% growth next year, while Canada will take a breather and turn in a slightly more modest growth rate of 3.4%.
Will Canada benefit as the world economy heats up? Is Stephen Poloz too optimistic? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.
Filed by Steven Lamb, Advisor.ca, firstname.lastname@example.org