Outlook for 2011: A story of patience and no straight line to prosperity

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Can the global economy stay in drive?

That’s the question that’s concerning most as we head into 2011 with an economy showing considerably less oomph than it did at the start of the year, and what Dawn Desjardins, assistant chief economist with Royal Bank of Canada, addressed at the recent Ontario Trucking Association annual convention.

Although the economy has been in recovery for a full year now, Desjardins acknowledged in some industries (trucking would certainly be among them) it may not feel that way.

“We have a lot of room to go to get to pre-recession levels and it’s not going to be a straight line to prosperity,” she warned.

The need to start regrowing inventories, which had been significantly reduced during the recession, drove much of the growth of the final quarter of 2009 and first quarter of 2010, but inventory growth has since slowed considerably, Desjardins said, adding, “We don’t see it continuing at an aggressive pace.”

The sluggish American economy has much to do with the muted economic outlook. Americans lost 25% of their wealth from 2007 and only about a third has been recovered to date. As a result, consumer spending in the US, although finally on an upward trajectory after two years of declines, is only expected to grow by 2% this year and next. Historically, consumer spending increases at double this pace.

Home sales in the US are also considerably below peak levels since unemployment remains high and fiscal tax rebate programs have expired. The sector is expected to provide only modest support for growth in the US, Desjardins said, but at least it won’t act as a drag.

The situation is not as dire this side of the border. Canadian consumer spending accelerated this year and will account for about half the economic growth in 2010. The recession did take way about 400,000 jobs, but they were quickly recovered, Desjardins said. She expects the unemployment rate to drop from the current 7.9% down to7% by 2012.

The trade sector, thanks to our high dollar, however, is acting as a weight on future growth and the rising debt levels among Canadian families also bears watching.

Canadian housing is in decline following the strong activity shown in 2009, when interest rates became particularly attractive, but Desjardins said, “We are not in the camp that Canada’s housing market is headed the way of the US.”

And there are good reasons for hope for the US too, Desjardins said.

“We are seeing the work week being extended. Overtime has peaked and there is a rise in temporary hiring. We are sowing the seeds of future growth,” she said.

What will drive this growth? Business spending for one, if the corporate sector on both sides of the border can overcome its nervousness, a healthy banking system (at least in Canada), and a very accommodating policy in terms of interest rates, which Desjardins believes will remain low for another year.

International trade volumes have also not shown a slowdown yet and the Global Purchasing Managers Index remains in growth mode. RBC’s forecast for GDP growth for 2011 is in the 3% range.

“It’s a ‘glass half full’ scenario,” Desjardins said. “This is a story of patience and being accepting of the fact we are not going back to very strong growth any time soon.”

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