RECESSION FEARS DOMINATE OUTLOOK
World Bank warns of decreased capital flow, declining commodity
According to a gloomy new analysis from the World Bank “the world has entered a very difficult phase” that could lead to another widespread recession that lingers even longer than the one in 2008.
Europe already appears to be in recession, the report says, and this is having a global impact.
The 160- page analysis, entitled Global Economic Prospects, outlines the current economic picture: “Capital flows to developing countries have declined by almost half as compared to last year. And growth in several major developing countries ( Brazil, India, and to a lesser extent Russia, South Africa and Turkey) has slowed partly in reaction to domestic policy tightening. As a result, and despite relatively strong activity in the U. S. and Japan, global growth and world trade have slowed sharply.”
Although the report doesn’t look at Canada in much depth, I think it’s fair to assume that, while that “relatively strong activity” in the U. S. and Japan — our largest and third- largest trading partners — means a little good news for our economy, this is out- weighed by the bad news inherent in the global picture.
Canada is not only an unusually trade- dependent nation, it’s one that relies heavily on the export of commodities. And it’s the price of commodities that, not only in past recessions but also in the World Bank’s new forecast, that take a hit when economic activity slows. How big a hit could it be? If the worst comes to pass and a severe crisis develops, the report warns of a possible 24- per- cent decline in the price of oil and minerals. And while consumers might like lower food prices, that would inevitably mean lower incomes for producers.
“Overall, global trade volumes could decline by more than seven per cent,” it concludes.
Canada has been relatively insulated from the shocks that have rocked international banking sectors, first in the U. S. and now in Europe. Yet these have plenty of global repercussions that buffeted our economy, and a renewed financial crisis could mean more trouble ahead.
For developing countries, many of whom have acute and ongoing need for outside financing, the fallout could mean serious constriction of the credit available to them.
One factor that will be different if recession strikes again so hard on the heels of the last, is that governments’ ability to respond has been sorely curtailed. Canada did not have to engage in the kind of bailouts of “too- big- to- fail” institutions that took place in other developed countries, but our federal and provincial governments did engage in a $ 47- billion spending spree on “shovelready” projects to try to goose our economy while it faltered.
Given the very iffy results of that spending — interim auditorgeneral John Wiersema and many other critics have raised some troubling questions about its effectiveness — I’m reluctant to argue it would be a good idea to try that again. But even if such an argument were to win the day, it’s hard to imagine our governments finding the cash in this tight- money era.
Indeed, the Conference Board of Canada, in an analysis released Wednesday, suggested that not only governments, but also consumers and businesses, will be cutting back on spending in the coming year in response to high levels of debt.
Of course, this bleak analysis may not come to pass — economic history is littered with forecasts that were off the mark, some of them by a country mile. But these documents nonetheless serve as a not- atallwelcome reminder the new year party season is over.