Canada’s economic outlook for 2011

By Troy Media —— Bio and Archives October 15, 2010

Comments | Print This | Subscribe | Email Us

Dr. Roslyn Kunin, BC Business Columnist, Troy Media It’s that time of year again. As we move into the final quarter of 2010, crystal balls are being dusted off to give us an early glimpse of what 2011 will hold. Prognosticators have good reason to be apprehensive as they prepare their forecasts. If we look back to the beginning of the last recession, we find that most forecasts made then were off the mark, usually because they were far too pessimistic.

The forecasters had reached those gloomy conclusions by following models that had worked well for them in the past. Those models gave heavy weight to the United States. The U.S. was and still is the biggest economy in the world. It was the American housing bubble, creative credit and financial crisis first felt in late 2007 which started the downturn in the US and, in earlier times, would likely have taken the global economy down as well.

A very different place

But the world economy in the early part of the 21st century is very different than in the 20th, especially when we look at Asia. Unlike the 1990’s, when the Asian financial crisis had the newly developing countries in a panic, the depths of last recession in 2009 saw all the sub regions of Asia - central, east, southeast and the Pacific Islands - still enjoying positive growth. At 5.2 per cent, growth in developing Asia (that is Asia minus Japan) was lower than it had been, but still strongly positive and high enough to be the envy of most countries in the world. (Data on Asia is from the Asia Development Bank). This changing pattern occurred because, over the last ten years, Asia in general and China in particular have moved away from reliance on exporting to American markets and toward much more reliance on internal Asian trade, growing domestic markets for both investment and consumer goods and services. A decline in the U.S., therefore, is less likely to pull them down. Rather, they are more likely to add their own direction to future global activity. When we try to establish what will be happening in the Canadian economy next year, we would do well to avoid the mistakes of the past and keep Asia firmly in our sight. Of course, this does not mean that we ignore the U.S. America is still a large and important market for Canada. But, right now, it is a rather weak market and not likely to be looking up much during 2011. No one is forecasting a boom in the US next year and, while a few diehards still foresee a recession (the dreaded double dip), most see continuing modest growth at a rate of just under two per cent. In the past, this would have condemned Canada to a very similar rate of growth. Now Canada is exercising more options and looking at what we used to call the Far East but now think of as the Near West. For 2011, developing Asia is expected to grow at 7.3 per cent, more than three times the U.S. rate. And the two biggest economies there, China and India, will increase by 9.1 per cent and 8.7 per cent respectively. Canadians, especially in the West and especially in the food and resource sectors, are now turning away from the relatively stagnant U.S. markets to the growing Asian markets. The forest industry in British Columbia is one example. Instead of relying very heavily on selling dimension lumber to the US housing market, the forest sector is selling not only building materials to Asia, but also pellets and other biomass from the forest to be used as an energy source. Canadian producers have often turned to Asia when the U.S. market was poor but then promptly turned back again when the American economy recovered. Let us hope that this will no longer be the case and that we will benefit from having more customers rather than fewer, especially when the new customers are growing quickly and are hungry for all we can supply.

There are risks, however

Forecasting is always difficult and growth in Asia may be weaker than foreseen. Some risks to the forecast include inflation, the impact of untimely changes in fiscal policy and excessive spending on housing at the expense of more productive investment in infrastructure and machinery and equipment. It was too much weight on the housing market at the expense of other capital spending that helped tip the States into recession. At this time, China is experiencing a housing boom, particularly in its major cities. This is balanced by extensive investment in infrastructure, etc., by government. However, if the latter is withdrawn too quickly, harm could be done to growth prospects. Even with the risks and the unknowns, we anticipate that developing Asia will continue to grow strongly in 2011 and Canadians will take advantage of the markets there. This means that Canada should enjoy a comfortable, if not exuberant, rate of growth of between two and three per cent in 2011.