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The economy’s not as bad as you think: Scotiabank’s Gomes

MISSISSAUGA, Ont. -- Slow growth is still growth, and with the exception of Europe, the global economy continues to plod along on the path to recovery.


MISSISSAUGA, Ont. — Slow growth is still growth, and with the exception of Europe, the global economy continues to plod along on the path to recovery.

Carlos Gomes, senior economist with Scotiabank, delivered an upbeat economic overview this morning to a packed house at the 2012 Surface Transportation Summit hosted by Motortruck Fleet Executive, Canadian Transportation & Logistics and Dan Goodwill & Associates. More than 200 leading shipper and carrier executives were on-hand for the event, which kicked off with an economic overview from Gomes. His message was one of optimism, despite contradictory news reports that at times seem to have the economy headed straight back into the toilet.

“I do remain optimistic with respect to the outlook, notwithstanding the challenges we hear about on a regular basis,” Gomes said.

Normal post-recession GDP growth would come in at about 5% per year, but instead, the global economy is growing at a clip of just over 3%.

“It’s not the rapid growth of around 5% that was typical in a recovery, but the point is, it is continuing to grow,” Gomes said. In North America, economic growth is even more sluggish, at about 2%. The Euro-zone is the only region in the world that is still in recession, with a declining economy. But Gomes pointed out Europe accounts for only 15% of global GDP, “so we have 15% that’s contracting and we have the remainder which is improving.”

The pace of employment around the world is holding up well, Gomes noted, with emerging nations leading the way in job creation. Global trade has surpassed pre-recession levels and is now at record highs, Gomes pointed out.

In North America, Gomes noted auto production is up 20% this year, giving a boost to overall manufacturing activity and, of course, transportation.

“Our view is the auto sector will continue to see improving sales and one of the main reasons is the fall-off in the US was so dramatic in 2008-2009, you now have an average age of the US fleet of 11 years,” Gomes said of the auto industry. This pent-up demand for new vehicles is good news for the auto industry and the carriers that support it.

Gomes also spoke of an uptick in Canadian building permits, mostly driven by industrial activity. Gomes acknowledged that many nations are saddled with high debt levels, with the exception of Canada where the net debt-to-GDP ratio is a reasonable 35%.

But what about American consumers and their out-of-control spending habits, coupled with rising gas prices? Is consumer spending at risk? Gomes said when you look at the percentage of household income eaten up by debt and energy payments, Americans have aggressively paid off debt and brought that indicator down from 20% pre-recession to 16% today. “That is the lowest level in more than a decade, so Americans are in much better financial shape to withstand any hits from energy costs than they were in 2007-2008,” Gomes said.

Canadians, on the other hand, continue to take on more debt, and see 13.6% of their disposable income spent on energy and debt payments, still below US levels but not trending downward as it is with our neighbours to the south.

One of the biggest sources of concern is the so-called fiscal cliff facing the US, when $500-billion in tax increases and spending reductions are slated to take effect Jan. 1, 2013.

While it will be good for the US balance sheet, there’s concern it could put the brakes on economic growth. Gomes said the situation is manageable and expects Democrats and Republicans to come together with a solution to postpone some of the tax increases and spending reductions.

“What we are saying is, there is time, we think there’s going to be an agreement between the two parties because it would be irresponsible from everyone’s perspective to allow that to happen,” Gomes said of the fiscal cliff. “We think they’re going to reach an agreement prior to Jan. 1, in order to not have a drastic effect on the economy. There are risks, but it’s a political decision that can be dealt with…I’d keep my eye on that with the understanding that it’s one of the biggest risks in the system, but there will likely be some agreement prior to the deadline.”

Meanwhile, monetary policies around the world will continue to be geared towards reviving growth, Gomes predicted.

“Every central bank in the world is in easing mode,” he said. “They’re all on the same page, they want to ensure this recovery is sustainable and they’re able to keep rates low because inflation has come down across most of the world.”

Gomes noted the emerging BRIC nations continue to outpace the recovery of the rest of the world and said Canada would be well advised to begin seeking stronger trade relations with these countries. Canada still sends most of its exports to the US and Europe.

“The global economy is no longer just the US and Europe,” Gomes warned. “Asia is over 35% of (the world’s) total population, but our exports to Asia are very small; only 9% of our exports (go to Asia).”

Gomes predicted 3.5% global GDP growth next year, up from 3.1% this year. The North American economy will continue to grow at about 2% year-over-year, he added, and there should be some “stabilization” in Europe in the second half of 2013. He also projected continuing strength for the Canadian dollar, with it reaching $1.04 versus the greenback by the end of next year.


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