The State of the Global Economy – Cooperation as the Key to Recovery

February 3, 2009

Premier Campbell, Minister Hansen, fellow panelist Elyse Allan, ladies and gentlemen.

It is a privilege to return to my native province and to share some thoughts with you on the state of the global economy.  This is a humbling challenge, for a definitive assessment in the face of the current uncertainty and complexity is beyond the capabilities of a mere mortal!

I will focus my remarks on three subjects: first, the state of growth and industrial production in major economies; second, the connection between the economic malaise and the still-unresolved financial crisis; and third, the growing danger of protectionism.

Simply put, growth prospects worldwide are dismal and industrial production is falling like a stone.  Overall GDP growth is expected to drop to 1/2 percent or less in 2009.  We should not rule out the possibility of an outright contraction.

Economic data in recent days show that in the closing months of 2008, the United States economy turned in its worst performance in a quarter century.  Gross domestic product fell at a 3.8 percent annual rate in the fourth quarter.

Canada appears to have gone into recession later, and is contracting at a more modest pace, with GDP falling at an estimated 3 percent annual rate in the latest quarter.

GDP growth prospects in the Eurozone are dismal as well, with Germany, France, the United Kingdom and Italy all seeing contractions in their economies in 2009.

The situation in Asia is no better.  China’s GDP, which expanded by a stunning 13 percent in 2007, fell sharply to 6.8 percent in the year to the fourth quarter.  The Economist estimates that in the same quarter, Japan’s GDP fell at an annualized rate of 10 percent, Singapore’s at 17 percent and South Korea’s at 21 percent.  The risks to India’s growth have increased dramatically as well.

To many, the sharp downturn in Asia comes as a surprise.  It was generally believed that the massive increase in intra-regional trade and investment would shield Asia against a downturn in the United States and Europe.  So much for the theory of “de-coupling”.

As for the developing world, the news is not good.  With commodity prices and exports tanking, growth is expected to fall by half in 2009.

With global growth collapsing, the impact on industry has been brutal.  It is estimated that global manufacturing production is likely to have fallen at an annualized rate of 20 percent in the last three months of 2008.  Trade flows, as a result, have slowed dramatically.  The sharp fall in commodity exports is aggravating this slump in trade.

Terrible prospects for growth, industrial production and trade inevitably lead to painful consequences for people.  In all parts of the world, unemployment is rising, contributing further to falling demand and to ever more urgent calls for government assistance in the form of stimulus packages and the protection of domestic industries and jobs.

In recent months, we have seen plenty of fiscal initiatives aimed at supplementing the stimulus already being offered by central banks around the world.  Governments in the United States, here in Canada, in Europe and in Asia have come forward with a mixture of infrastructure spending, relief to the unemployed, subsidies to business and tax cuts.  Particular attention is being paid to the $819 billion stimulus plan introduced by President Obama, passed by the House of Representatives last week and now before the Senate.

While debate rages about whether the cumulative fiscal stimulus worldwide is enough to soften the blow of a serious recession and prevent a slide into a possible depression, a parallel debate surrounds the viability of the financial system.  Canada’s financial institutions are relatively strong, and its regulatory framework sound.  Those who would fix the global system, however, are pointing to a future that will see financial institutions that are smaller, better regulated and more conservative.

But in the meantime, despite massive sums of money that have been flung at restoring confidence in banks and making credit more accessible, fear and uncertainty prevail.  What is the solution?  Some look to government guarantees and insurance.  Others propose putting toxic assets into a so-called “bad bank”.  Still others suggest temporary nationalization.

I certainly do not claim to know the answer.  Indeed, I do not believe there is a single answer.  But one thing I do know is that the uncertainty is compounding the world’s economic problems and a solution is urgently needed.

My final point has to do with a growing menace that threatens to sink us all unless strong leadership and common sense prevail.  I am referring to the alarming rise of protectionism in all parts of the world.

A deeply worrisome manifestation of this trend is the “Buy American” provision of the American Recovery and Reinvestment Act passed last week in the United States House of Representatives.  The legislation would bar imported iron and steel from infrastructure projects funded by the $819 billion federal stimulus package.  In the meantime, the Senate is considering a measure that would extend the “Buy American” provision to all goods and services purchased with stimulus money.

This development in the United States and recent protectionist measures in various parts of the world are, of course, inconsistent with the commitment made by the leaders of the G20 at the November 2008 meeting in Washington.  The American action in particular would send the wrong signal at the worst possible time.  Keep in mind a powerful lesson from the past.  In 1930 the United States introduced the Smoot-Hawley Tariff Act, raising barriers against more than 20,000 imported goods.  Retaliation was swift and in the four-year period leading up to 1934, the total volume of world trade fell by an astounding two-thirds — giving new meaning to the term “beggar thy neighbour”.

I return to the importance of leadership.  On February 19, President Barack Obama will arrive in Ottawa for talks with Prime Minister Stephen Harper.  In announcing the trip, President Obama said that the choice of Canada’s capital for his first foreign visit “is a testament not just to the size of our trading relationship and closeness of our alliance, but also the strength of our friendship”.

President Obama is right: the ties of friendship between Canada and the United States are strong.  So, too, is the unparalleled interdependence of our industries and workforces.  I can think of no better occasion or opportunity for the two leaders to say to each other and to the world.  “We stand for freedom of commerce, we stand resolutely opposed to protectionism.”

Premier, Minister, ladies and gentlemen, I admit to having offered you a somber perspective on the state of the global economy.  The year ahead will be difficult, painful and full of surprises.  Eventually, fear will dissipate, confidence will return and so will growth.

The speed with which we return to better times will depend largely on sound policies, a willingness to accept transformative change, strong and principled leadership and the closest possible cooperation among the key global economic actors.  Over the past several days, at the World Economic Forum in Davos, political and business leaders alike spoke of the urgent need for consensus on policy and action, and I could not agree more.  To put it bluntly, failure to dig ourselves out of this mess will carry with it incalculable consequences for the world order as we know it.