Alex Carrick: Economic insights into a world being pulled in too many directions


Economists are guilty of applying the term too often. We’re fond of saying the outlook is uncertain. Well of course it is. It almost always is. Usually some trends are evident nonetheless.

At this time, however, maybe the situation really is in greater flux than most of us are used to experiencing.

The number of issues awaiting resolution—in such spheres as the economy, politics, the Arab world, emerging markets and aging populations—is long and varied.

Let’s look at some of these and see what conclusions we can draw. Nobody is sure what’s going to happen in Europe. On account of debt problems and austerity measures, gross domestic product (GDP) growth is expected to grind to a halt this year. One saving grace may be a decline in the value of the Euro which will help Germany with its export sales. But if one or more heavily indebted nations withdraw from the Euro zone, the strains on the banking sector will be severe.

Partly on account of the slowdown in Europe, expectations for China are being lowered. Weaker export sales will reduce GDP growth to 8.0 this year versus 10 per cent over the past decade. Also, Beijing has been clamping down on lending by banks to reduce the general level of price inflation and to deflate commercial and residential property bubbles. Commodity prices are easing from their recent peaks due to the moderation in demand from the emerging world.

Canada has become highly dependent on high commodity prices. They are a reflection of strong demand for our raw materials and they act as a spur to mega project investments in our resource sector. The pull-back in commodity demand and prices will inhibit how quickly Canada grows in 2012.

There has been no diminishment of one trend with respect to resources. Thinking strategically and over the longer term, Chinese enterprises are still looking to line up raw material supplies. In the past, this has meant firms from China taking junior partnership positions in major mining and energy companies. Those were tentative baby steps. Headlines in the early going of this year are featuring stories about Chinese enterprises now acquiring outright ownership of major resource companies in North America.

Thankfully, Canada is about to get help from a U.S. economy that is starting to perk up. Employment south of the border has increased for the past 15 months in a row. Nearly 3million jobs have been created since the depths of the recession.

The U.S. manufacturing sector has been on a roll and the housing market appears to have bottomed out. Resale and new home prices, as well as starts, should gradually register improvement as the year progresses. The rental market is leading the way. 

In 2012, a more normal, although muted, cyclical recovery will be evident in both Canada and the United States. South of the border, the economy will pull ahead by about 2.5 per cent. Canada will trail at 2.0 per cent.

Canada U.S. relations

Relations between Canada and the U.S. will never be quite the same as they once were. This will be especially true in the realm of trade. We can no longer count on the same huge surplus in our merchandise account that used to be routine. Our lumber sector has lost export sales on account of the U.S. housing market being in a coma for six years. Even when U.S. home starts begin to recover, it’s a sure thing that imports of Canadian softwood lumber will be challenged in court. They always are, any official agreement notwithstanding. It’s what U.S. lumber producers have been doing for 100 years.

When it comes to energy, the U.S. is moving closer to self sufficiency. Thanks to technological advances, previously inaccessible natural gas deposits in shale rock are being developed at a rapid pace. Canadian natural gas exports to the U.S. have been left struggling.

The next stage will be to release “shale” or what is sometimes also called “tight” oil. The environmental movement is ramping up its efforts to stop these oil and gas projects. For their part, producers claim the resources lies well below groundwater levels and aquifers. 

The postponement of a decision on TransCanada’s Keystone Pipeline has demonstrated how American politics takes precedence over Canadian business interests. This shouldn’t be a shock, but it’s another reminder of how we in Canada must also make decisions in our own best interests.

In delaying approval for Keystone XL, the Democrats have bowed to the environmental wing of their party. The Republicans have largely endorsed the project as a means to generate jobs and reduce reliance on Middle Eastern oil.

Canada now has its own major pipeline debate. Hearings have started on Enbridge’s Northern Gateway proposal to move half a million barrels of oil per day from fields in Alberta to a shipping terminal near Kitimat, B.C., for further transport by tankers to customers in Asia.

Public forums to review the project will pit environmentalists, some native bands and Hollywood celebrities against the Harper government, firms in the energy sector, and most economists.

Natural Resources Minister, Joe Oliver, has thrown down the gauntlet in an open letter to the media. He wants the assessment process for giant resource projects speeded up. He has also expressed disapproval of outside interference, in the form of foreign financial contributions and visitations by Hollywood celebrities, in Canada’s affairs.

One thing’s for sure. Through extensive coverage of the deliberations, we’re about to be treated to a couple of years of loud and acrimonious wrangling.   
The housing sector in Canada has shown remarkable strength since the worst of the recession. Multi-unit starts (i.e., condos) have been particularly strong in Vancouver and Toronto.

With the notable exception of developers, most people seem to feel the market is overbuilt in condominiums. If there is a correction and home prices fall to a significant degree, say minus-10 per cent or more, this will have a detrimental effect on consumer confidence.

There is another major threat to what has so far been a rather fragile recovery. When gasoline prices go through one of their periodic eruptions, the whole economy is placed in a bind. Petrol prices have settled down of late, but will that last?

The problem is that gasoline is simply too pervasively important. Paying more at the pump, to get to work for example, takes away from spending in all other areas. Unfortunately, any number of events could cause a spike in the global price of oil.

Iran may be close to nuclear weapons capability. Tehran, chafing at tougher trade sanctions and assassinations of several of its top nuclear scientists, is threatening to close the Strait of Hormuz. That would cripple the availability of one-third of the world’s tanker shipments of oil.

Much of the Arab world is in turmoil. The regime in Syria is oppressing large swathes of its own people. That’s not the end of the potential flash points. The policies to be adopted by newly or soon to be elected regimes in Egypt, Libya and Tunisia are still to be revealed.

There is at least one final factor that will have an increasing and ongoing impact on our economy. The vanguard of post Second World War baby boomers in North America, born from the mid-1940s to the mid-1970s, has reached the previously-normal retirement age of 65.

If the advancing tide of seniors switch from working and spending to hunkering down and hoarding–in the form of cash, tangible assets and fixed income securities–the effect on the stock market may be profound. Worries in this regard are probably overblown.

For starters, many seniors will continue to work long past when their parents called it quits. Second, disappointment with current low interest rates will cause many seniors to stick with equities as a means to earn higher returns. The temptation will be enormous to try to maintain their lifestyles.

Only time will reveal whether or not this turns out to be a good decision.

Finally, many boomers are about to inherit large sums of money from their parents. Obviously, economics aside, this is not a happy subject to contemplate. Nevertheless, it’s true that over the next 20 years, there will be perhaps the largest transfer of assets in history. Much of the money will end up in the stock market.

Alex Carrick is Chief Economist with CanaData, a division of Reed Construction Data (RCD). CanaData is the leading supplier of statistics and forecasting information for the Canadian construction industry. RCD is a division of the global publishing firm, Reed Elsevier. For more economic insight from RCD, please visit Mr. Carrick’s lifestyle blog is at and he would welcome a follow on Twitter (Alex_Carrick) or Facebook.