TORONTO - It is the duration, not the intensity that is defining the current economic slump throughout the world, according to Scotia Economic’s Global Outlook report.

"Global economic activity has fallen into a big valley," says Warren Jestin, Scotiabank's Chief Economist. "Since mid-2000, the record-long expansion enjoyed by the United States through the 1990s has given way to one of the longest periods of sub-par growth since the 1930s."

Manufacturing exports, technology, and commodity-based industries have been in decline each year since 2001, making them the hardest hit. Profit losses and excess stock have led to widespread cutback in capital spending throughout the world. As earnings continue to fall downsizing and consolidation will be on the rise.

"In contrast, the consumer has remained relatively upbeat in the United States, Canada, the U.K. and, to a lesser extent, the Euro zone," says Jestin. "Very low interest rates, heavy price discounting and the sharp drop in energy costs have cushioned purchasing power and provided households with the incentive to keep shopping despite mounting layoffs, volatile equity markets and the shock of September 11."

The global economy is expected to improve by the spring of 2002 with G7 monetary policy settings aimed at bolstering economic activity. However, this activity will rely heavily on consumer spending as trade and business investments are expected to remain slow.

The US is expected to lead the world recovery with a growth forecast of 1 ½%, with Canada and Mexico close behind. Canadian figures are projected to be on par or slightly below the US. Mexico’s economy is expected to grow by 1 ¼% in 2002. A strong peso and domestic equity markets indicates investor confidence and long-term potential for growth.

"Exports will be supported by Canada's very competitive exchange rate, but the potential for a speedy revival will be hampered by lingering softness in commodity markets and the potential fallout from trade disputes," indicates Jestin. "The implementation of enhanced border security may be a temporary speed bump." Jestin went on to say that the Federal Reserve and the Bank of Canada are likely finished with the rate slashing.

The status of the US dollar remains up in the air, but will be supported by the safe haven premiums global investors have given to American dollar assets. The Japanese yen will continue to suffer, as will the Euro. A soft commodity market, trade surplus reductions, and a deterioration of our fiscal prospects will continue to keep the Canadian dollar vulnerable. Jestin predicts a trade value of low to mid-60 cent (US) throughout the rest of 2002.

The provinces will be looking to practice restraint in an effort to stall or limit possible deficits in the 2003 budget.

Offshore oil and natural gas activity will maintain the Atlantic provinces growth with other resource and manufacturing industries following in the next year. Ontario and Quebec expected to see further decline in motor vehicle assemblies, although the decline will be smaller than in previous years. Western Canada will see the resource industries maintain a conservative stance with a revival in activity and employment by the end of the year.

Ottawa also faces a deficit threat; however, efforts to avoid one should limit the damages. The US budget isn’t expected to fare as well. Reduced economic growth, tax cuts, and increased security/defense spending are expected to bring the country into a deficit.

The Global Outlook is available online at www.scotiabank.ca.

 

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