TORONTO, Sept. 2 /CNW/ - The global economy is turning the corner, with
economic news moving increasingly from the bad towards the good side of the
ledger. Enormous fiscal stimulus has put China at the vanguard of nations
starting down the road to recovery, with the U.S. appearing to be in the pole
position among major developed countries, according to the latest Economic
Directions released today by Scotia Economics.
    "In the U.S., massive monetary and fiscal stimulus is beginning to gain
traction and will account for the majority of growth during the next year,"
says Warren Jestin, Chief Economist, Scotiabank. "Government initiatives are
bolstering disposable income and spending at a time when households are
focussing on reducing debt and rebuilding savings. Monthly job losses appear
to have crested and confidence surveys suggest that consumers and businesses
are becoming less negative about current conditions and cautiously more
optimistic about prospects for the balance of the year."
    According to the report, inventory restocking will give an added boost to
recovery. Automakers are restarting some idled plants now that inventories are
within their comfort zone and sales have started to recover. U.S. housing
activity also has bottomed after three years of unrelenting decline, although
prices will continue to be depressed by a large volume of distressed sales and
the huge overhang of unsold properties on the market or waiting in the wings.
    "While the convergence of government stimulus and inventory rebuilding
will boost economic performance in the months ahead, U.S. growth through 2010
will do little more than backfill the hole created by the recent steep decline
in activity," comments Mr. Jestin. "It will take longer to reverse the 22 per
cent drop in U.S. household net worth since mid-2007, to revitalize housing
and to restructure the financial services and motor vehicle industries."
    The European and Japanese economies also are showing tentative signs of
turning the corner, and with the exception of the U.K., have not suffered the
seismic shocks that have reverberated through the U.S. financial system.
Nevertheless, the economic retrenchment in these overseas nations has been
larger than on this side of the Atlantic and their recent GDP losses won't be
recouped until well beyond 2010.
    "In this environment, emerging markets will provide a large share of
global locomotion. Even in a year when global output is shrinking by nearly
three per cent, China and India are expected to expand by six to eight per
cent in 2009," says Mr. Jestin.
    Financial markets will remain volatile during what is likely to be an
uneven and protracted global convalescence.

    What the Global Recovery Means For Canada

    While Canada's performance was lacklustre through the first half of 2008,
it was partially insulated from the deepening retrenchment in the U.S. and
other developed nations by the resilience of its banking system, the relative
financial strength of the government and household sectors, and by a huge
revenue infusion from booming commodity markets.
    "Our nation was dragged fully into the global recession only when
faltering emerging economies triggered a collapse in resource prices and
export earnings," says Mr. Jestin. "Even then, the erosion in employment,
housing activity and car sales has been less severe than south of the border.
    "The bottom line - we will soon begin moving away from one of the most
difficult economic setbacks experienced in our lives, but patience will be
required because the road to recovery will be a long and winding one," Mr.
Jestin continues.

    Beyond Economic Recovery - New World Realities

    According to Mr. Jestin, the road to recovery won't take us back to the
world that existed before the sub-prime crisis began. The global financial
system is being revamped and, in some areas, reconstructed. Big government
deficits are back and will be politically difficult to unwind. We soon will
begin to experience the profound impact of an aging global population and the
crusade to improve energy efficiency and environmental outcomes.
    The global economic landscape also is changing, with developed nations
like Canada and the U.S. likely to experience relatively subdued growth in the
decade ahead. World activity will be driven increasingly by China, India,
Brazil and other emerging powerhouses, with their production and investment
decisions having a major impact on world trade, commodity prices and financial
markets.
    Focussing our collective attention and scarce national resources on
supporting the familiar while avoiding the unfamiliar is a losing strategy.
Government subsidies and other temporary palliatives can't insulate domestic
business from the powerful forces reshaping the global economic landscape.
Currency depreciation won't be riding to the rescue - rising commodity prices
may soon push the loonie to parity and beyond.
    "When it comes to helping business adjust to these new world realities,
Canadian governments have limited resources and a long 'to do' list that
includes fully implementing the proposed plan for a more competitive corporate
tax structure, returning to fiscal balance and investing in big-ticket
transportation, power and communications projects. Among the many competing
priorities, however, education and skills training should be right at the top
of the list because work force quality is one area where we must be able to
compete with the best," concludes Jestin.
    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
developments, currency and capital market trends, commodity and industry
performance, as well as monetary, fiscal and public policy issues.