The Great Hesitation

Global growth is just about to take off. To most, that sounds like some kind of sick joke, about as likely as Linus’ Great Pumpkin showing up last Monday. We’ve already gone through the ritual mid-year writedown of economic forecasts, and pundits are now slicing points off next year’s markers. Seven years beyond global recession, can we not just get real and admit that there has been some big structural shift that has permanently lowered growth everywhere, that serial shocks to the system are entrenched, and that the job of every entrepreneur is to fight hard for an increasing share of a diminishing pie?

Actually, the Great Moderation of recent years was predictable. The last growth cycle was unusually long, about double the normal span. It gave rise to a five-year, super-sized period of excessive growth at the end of the cycle that thanks to the advent of globalization was exported everywhere. This bubble burst in spectacular fashion in late 2008, inciting panicked leaders the world over to throw a coordinated mountain of cash at the economy. It worked, but only for a few months. With five years’ worth of excesses to use up, the global economy quickly slumped into the sluggish pace that has become all too normal. But is it? Not if you see this as a standard economic cycle that globalization and technological revolution simply exaggerated.

If so, we should be entering the growth phase anytime now. There is one ingredient critical to recovery that has been absent for most of the post-recession period. It’s now back, and it is actually swelling every day that growth remains sub-par. It’s called pent-up demand, and it’s very evident in the US economy. Its housing market was an icon of excess in the pre-recession period, and it crumpled as the economy crash-landed. It recovered, but to levels well below normal. Why? Because millennials – the next wave of household-formers – were left behind by the recession. After seven long years, there’s now a millennial comeback. 72 successive months of impressive job gains stateside have created enough pressure in the job market that millennials are flooding back in, and in short order will more fully reboot the housing market. As this is a key leading indicator of the US economy, other sectors will in time mimic this growth.

Like America, Europe’s doldrums have also created significant pent-up demand. After a long hibernation, the construction sector – both residential and non-residential – seems to be firing up. Employment is also growing steadily, and the region-wide unemployment rate is falling at the same pace as America’s, although about two years behind. If we are right about this, then it seems that the twin engines of the world economy are revving up again. If so, emerging markets, and in particular, the BRICS, should also see near-term improvement. These are, in fact, critical elements of EDC’s Fall 2016 Global Export Forecast, released to the public on Tuesday.

Unfortunately, the story doesn’t stop here. At the very moment that those left behind by the recession’s ravages are being welcomed back into the market, it seems they have collectively run out of patience. Seven years is a long wait, and voters are finally speaking out. Brexiteers stunned the world by prevailing in the June UK referendum, and ‘outing’ Continental discontent. Americans – the ones who brought and taught modern globalization to the rest of the world – are now gorging on anti-trade electioneering banter. Uncertain of how all this will turn out, business is taking a ‘wait-and-see’ approach that is expected to delay, defer or drop key investment projects, with Europe’s outlook taking the biggest hit. The timing could hardly be worse – we may be on the cusp of a new phase: the Great Hesitation.

Canada’s exporters are expected to fare decently next year. Pent-up demand will favour sales to the US market, where the auto sector, consumer goods and wood products have done well. Export growth will occur on a broad base in 2017, helped by US demand, a subdued currency and reviving demand in other key markets. However, this outlook presumes that the negative rhetoric on trade does not turn into an ugly reality of wall-building, tariff-raising and the attendant and destructive reprisals.

The bottom line?

Hesitation may mark the near-term outlook. But it’s happening in a context of significant pent-up demand, not mounds of excess. If so, others are running from opportunities that could be the best ones we’ve seen in years. Any takers?

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