08/07/2014 12:41 EDT | Updated 10/07/2014 05:59 EDT

Don't Believe Gloomy Headlines - The Global Economy Is Picking Up

Daily news seems to run cross-grain to this week's title. A deepening crisis between Russia and Ukraine. Intensifying strife in the Middle East. A rapid outbreak of deadly disease in West Africa. Wild weather and natural disasters. Some are concluding that we need to factor in these events -- which used to be called anomalies -- to our forecasts, given their recent frequency. Yet at the same time, the economy is chugging along, and gaining momentum as we speak. There are still a number of key reasons that the forecast remains upbeat. Here goes:

First, the U.S. economy is continuing to gather strength. True, forecasts have been revised down substantially from early-year estimates, but dig a little deeper and it's obvious that the write-downs are all due to temporary factors that hit first-quarter output. With that now behind us, the second quarter was up by 4 per cent, an unleashing of the pent-up pressure in the previous three months. The most recent consensus outlook expects this pace to persist in the second half of this year. We agree -- multiple signals show that the US economy is still operating below normal, and with employment and sentiment both improving, the economy is poised for a strong run of growth.

That's good news, because the rest of the world desperately needs a growth engine. Most other economies are not in a position to take the lead, but at the same time, they are posting better performance thanks to the US revival. This is giving rise to a second key reason for a bright outlook: key indicators in the rest of the developed world are still improving. The OECD leading indicator saw a setback in the first quarter of this year, but after it shrugged off the impact of temporarily softer US performance, it resumed its strong up-trend. Although growth is not spectacular the non-US OECD bloc is generating steady growth that is boosting the overall global picture.

A third factor is underrated, but highly significant. Analysts may drone on about the sluggish 'new normal' that we can all look forward to, but consumers and businesses the world over are feeling more optimistic than they have for years. Confidence is on the rise, and as it translates into real consumer and investment activity, the upbeat attitude is likely to increase further. Remember, this key economic element has effectively been missing from the economy in the post-crisis period, so its return is highly significant to the outlook.

Fourth, we expect developing markets to re-emerge. They've gone quiet in the past couple of years, weary of waiting for the world's large economies to get going again. Their recent record has persuaded pundits to throw them into the 'new normal' soup. However, as the large economies gain strength, we expect activity to spill over quickly into emerging markets, firing up their trade with the rest of the world from its prolonged, semi-dormant state. This will happen quickly enough to bring a tidy increase in growth across emerging markets, with few notable exceptions.

Canada is poised to benefit from stronger activity. The export sector is already seeing the benefit of higher US growth, and should build on this strength as the rest of the world catches on. Higher emerging market activity is expected to boost demand for Canada's primary products, and renewed global business investment is projected to send exports of machinery and equipment soaring. EDC's Summer 2014 Global Export Forecast sees Canadian exports rising by 5.9 per cent this year and 5.1 per cent in 2015, well ahead of the pace of overall GDP growth.

At the same time, the Canadian dollar should lend support to export growth. Continued tapering of quantitative easing by the US Fed is expected to put downward pressure on commodity prices. That, together with expectations that the Fed will start hiking rates ahead of the Bank of Canada, and the moderate strengthening of the greenback points to a Canadian dollar that will average US $0.92 for the next 18 months.

The bottom line? Look past today's gloomy headlines, and there's a global economy that is steadily reawakening. Best not to be caught napping as the action ramps up. More and more, it appears that this time, it's for real.


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