Return to recovery? EDC predicts a better--but more cautious--export picture for 2004.

From the events of September 11, 2001, through to the war in Iraq earlier this year and the SARS epidemic that closed down hospitals, affecting major cities and scarring the reputations of cities like Hong Kong and Toronto, the global nature of markets has come into sharp relief. Confident, aggressive trading has been tempered by caution--and according to a report by the federal agency Export Development Canada (EDC), better business planning will be key to riding out the vagaries of an uncertain and tempestuous business climate.

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In Recovery Interrupted, an export forecast summary released earlier this year by EDC Chief Economist Stephen Poloz, the federal crown corporation takes a comprehensive look at global economic and trade conditions and trade with an eye to helping exporters and investors identify foreign market opportunities and risks.

Shaking off uncertainty

Certainly the theme of major disruptions causing general, rather than localized, uncertainty is key--and there has been a steady stream of disturbances over the past several years.

"Every time the economy shakes off a major disturbance, a new one comes along to replace it," the report says. "The economic implications of these shocks are impossible to predict, but the tangible result is business volatility. Companies get used to it--indeed, plan for it--by making sure their business plan can absorb major bouts of instability."

"Often the uncertainty is worse than the disease," said EDC deputy chief economist Glen Hodgson in a recent interview. "We seemed to get shock after shock of uncertainty. Enron, September 11, then sabre rattling toward Iraq. We got through that and then SARS hit. It was the latest of a series of shocks. That's why we call the report Recovery Interrupted."

There was a sense last year that the world economy was on the road to recovery, but it's a "bumpy road to a safe harbour," says Hodgson. "We had another cycle of uncertainty added (this year). We hadn't anticipated how unsettling the run-up to Iraq would be. The good news is that there is still a chance of recovery this year and we actually see a recovery in export growth."

According to the report, global growth was expected to average 2.9% for 2003, "similar to 2002 in terms of growth, but we should end the year on a more positive footing." Canada will continue to be a strong performer, with a growth forecast of 3.2%, compared to U.S. growth of 2.2%.

In export sales (excluding energy), Canada is expected to post growth of 3% for the year. That follows two years of export declines--the first in a half century--and strong performance in research sectors such as chemicals, ores and metals. Energy will be a leader and will likely post export growth of 22% before flattening out in 2004.

There will be moderate growth in agri-food, forestry and equipment exports; on the downside, automotive exports will soften and aerospace exports will also be reduced.

Still, "even a 3% baseline is better than 2% contraction," says Hodgson. Asian and European markets are expected to be the best markets for Canadian goods this year, along with anticipated strong shipments to China.

In fact, "Canada's exports to China decreased by almost 11% in 2002, but two highly volatile sectors account for the decline--grains and aircraft. Excluding these goods, Canadian exports to China were up by 11% last year," the report says.

New suprises, continued hope

Hodgson likens the worldwide trend of uncertainty to "the third reel of a movie." It has definitely been a business-adventure epic that's short on laughs but certainly long on drama and plot twists as the world economy rides out the upheavals. And a fourth reel? Business is betting against it, mainly because of the life lessons taken from the shake-ups of Enron, Iraq and SARS.

But the picture keeps on shifting, and yet another drama opened up in the Canadian market with a case of bovine spongiform encephalopathy (BSE), also known as mad cow disease, in Alberta. In a June commentary for EDC's Web site, Stephen S. Poloz, EDC's vice-president and chief economist, wrote that the "economic impact is still growing, and may persist, if the [previous] U.K. experience is indicative."

A long-term ban on Canadian beef exports could result in a "loss of approximately $2.5 billion in sales," said Poloz, in a market that was expected to amount to $5 billion in sales for 2003. And "second-round effects ... layoffs in packing plants, stockyards, shipping companies and the effects on feed suppliers will mean less spending, which could easily equal the first-round effect on the Canadian economy ... The lesson from the U.K. experience with BSE is that we face a serious near-term economic risk, and an uphill battle after that," Poloz said.

This may change the rosy outlook for Canada in 2004 somewhat, but not completely. The last few years have shown that the effects of globalization are likely here to stay, says Hodgson. It's up to us to adapt.

"Globalization has changed the way the world works," he says. "Most of us are trading more shares of GDP. Foreign investment took off in the 1990s and slowed in the last three years. (Greater investment and more trading) were good things, but the trend has its negatives, in that people are more dependent on each other. We have seen this not just in the Canadian economy, but even in the U.S., which is now more open--and China is 50% more open now."

The concerns are not "just contained in one country or one region," he adds. "I guess we're learning that the implications of globalization are not always rosy."

Bottom line lessons

Among those implications are issues like border security. With the abatement of tensions in Iraq, there is still the U.S.-Canadian cross-border issue, a hot button in places like Ontario. The Windsor Gateway border crossing, for instance, is North America's busiest international trade corridor, handling 30% of the two-way flow of Canada-U.S. trade by value, and about 25% by volume. And in Canada's wealthiest province, exports account for one million jobs.

"Security issues are turning borders into something more than just a line on the map," the EDC report says. "Governments are working hard to address these practical matters, but in the end companies will pay more to conduct international trade. Trade liberalization may stall in this environment, or even lose some ground. The implication is that global trade and investment, the engines of economic growth, are unlikely to return to their former glory days anytime soon."

The bottom line will demand that companies become better prepared to deal with uncertainty, according to the report.

"Growing our international business in such an uncertain environment will be a challenge. Companies need a plan that positions them to grow when the uncertainty abates, while making allowance for other, as yet unforeseen, bouts of volatility. Meanwhile, we believe that positive momentum will be restored in the global economy ... if so, then 2004 promises to be a much stronger year for Canada's exporting companies."

Hodgson says there are still some positive sights in store, and even a mild resurgence in the bottomed-out tech sector, such as the small increase in Nortel share values earlier this year, is cause for some optimism.

While the automotive sector will just have to tough it out for the time being, the prospect for aerospace is more problematic, says Hodgson.

"Aerospace is the lagging edge and it's not a reflection of the product itself," he says. "It was hit by everything from 9/11 to SARS--and it has affected personal travel and business travel--we've seen a 25-30% reduction in travel."

Future prospects will be tempered by a separation of hope and reality, adds Hodgson. "People are not surprised. Everybody hopes the numbers will get better faster (but) anyone who is a business adviser or planner on the ground knows the reality.

"The good news is that, for instance, the bottoming out in computer and telecom is a sign that companies are going to strategic investments and are trying to make themselves more efficient."

John Cooper ([e-mail]) is a Whitby, Ont.-based freelance writer.