By Warren Jestin: Senior Vice-President and Chief Economist, Scotiabank Group
The global economy is showing signs of turning the corner. In the months ahead, economic news may move 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. Among the developed countries, the U.S. appears to be in the pole position.
Signs Of Recovery Visible In The U.S.
In the U.S., massive government stimulus will soon gain traction and help to bolster incomes and support consumer spending, even as households reduce debt. Monthly job losses appear to be cresting, with consumers and businesses becoming more optimistic about prospects for the balance of the year. Automakers are even restarting some idled plants and sales have started to recover. U.S. housing activity also has bottomed after three years of unrelenting decline.
While signs of the U.S. recovery are becoming more visible, growth through 2010 will only partially make up for the recent steep drop in economic activity and the 22% loss in U.S. household net worth since mid-2007. It will take time to revitalize the housing market and restructure the financial and motor vehicle industries. Government stimulus also will be reined in next year as Washington is forced to reduce its huge US$2 trillion fiscal deficit, States struggle to balance budgets, and the Federal Reserve nudges up interest rates from near zero.
Strength In Emerging Markets
The European and Japanese economies are also showing tentative signs of turning the corner. However, the recession in these areas was much deeper than in the U.S. and it will probably take much longer for them to recover.
However, emerging markets will likely lead the way economically. Even in a year when global output is shrinking by nearly 3%, the economies of China and India are expected to expand by 5% to 7%, which should help drive commodity markets.
Sound Fundamentals In Canada
While Canada's economic performance was lacklustre through the first half of 2008, it did better than other countries because of its resilient banking system, relatively strong government and household finances, and booming commodity markets. Canada was only fully dragged into the global recession when collapsing resource prices put the brakes on exports and energy megaprojects.
Even then, our employment numbers, housing activity, and car sales have been better than in the U.S.
Like the U.S., Canada's turnaround may be given a lift when government-funded “shovel-ready” projects actually get into the ground. And the Bank of Canada is committed to keeping interest rates at extraordinarily low levels into 2010, when rates will gradually start to rise. However, with foreign sales accounting for one-third of the growth in the Canadian economy, the strength of our recovery will be tied to commodity markets and the health of the U.S. economy.
A Gradual Recovery
Canada is already benefitting from a rebound in commodity prices in response to rising demand from China and other nations, but global growth through 2010 will be too tepid to reverse last year's slide. Environmental uncertainties will also make the energy industry cautious about ramping up spending on megaprojects. The U.S. revival could help our exports, but a stronger Canadian Loonie will likely make it more difficult for our manufacturers. Auto exports will be slow to improve as the industry undergoes a prolonged restructuring.
For Canadians, the good news is that we may soon begin moving away from one of the most difficult economic setbacks experienced in our lives. Patience will be required because the recuperative process will be lengthy. The end result will likely be a world more dependent on emerging powerhouses like China for economic leadership and one where traditional industries like the auto sector must be restructured to align with a rapidly changing global marketplace.
How To Prepare For The Recovery
No matter what is happening in the economy and the markets, there are always steps you can take to today to prepare your portfolio for the longer term. Here are some fundamentals to keep in mind.
Ensure That Your Portfolio Is Fully Diversified: Diversification is one of the best ways to reduce risk. Your portfolio should hold a mix of equities, fixed income , and cash that matches your investment objectives and risk tolerance.
Take Advantage Of Global Opportunities: With the emerging nations such as China and India expected to lead the way, it's important to have some global exposure in your portfolio. This is particularly important for Canadian investors, as our market represents only about 3% of global investment opportunities.
Practice Dollar-Cost Averaging: When you have a pre-authorized savings plan, where you automatically contribute a regular amount to the investment of your choice, you take advantage of dollar-cost averaging. With this strategy, your regular investment automatically buys more investment units when prices are low and fewer when they are high.
This disciplined investment approach will see you through all market climates. Find out how to make the most of your investments and take advantage of opportunities by scheduling an appointment with a Scotiabank financial advisor.
