Economies can swing in one direction or another − it’s the nature of cycles − but eventually they come back into equilibrium. That’s where the world is currently headed.

The major reason is the U.S. slowdown, initiated by the problems in the financial sector, and the consequent easing in international commodity prices. Oil prices have dropped by nearly one-third since their peak level in July. This has been a signal for other commodity prices to retreat as well.

The U.S. dollar has made recent gains versus other major currencies, but this has been after more significant declines during the past several years. The result of the adjustment in the greenback has been a pickup in U.S. exports, helping the economy to record solid Gross Domestic Product (GDP) growth numbers even though new housing construction, auto sales and retail spending remain on shaky ground.

However, the dust is starting to settle on several important fronts. The number one indicator of a return to normalcy will be a general agreement that the financial sector is on a sounder footing.  (Canadians can be thankful that the financial services sector in this country has not been affected to anything like the same degree as in the United States, the United Kingdom and parts of continental Europe).

The U.S. economy can now be described as taking “the pause that refreshes.” However, the world is quite a different place than it was the last time the U.S. was struggling in 2001 and 2002.

The BRIC nations − Brazil, Russia, India and especially China − have risen to much greater prominence on the global scene. While they are caught up in the U.S. slowdown, like everybody else, their actions to satisfy domestic and foreign demand have the potential to quickly drive up prices again once the U.S. is back on a roll.

There have been recent examples of protectionist sentiment gaining a foothold around the world. This came to the fore earlier this year when several nations tried to ensure their own food supplies, given shortages of some staples such as rice. It has also played a role in U.S. politics, with outcries about manufacturing and service sector job losses overseas.

Nevertheless, globalization is proceeding at a rapid pace that cannot be stopped. The latest manifestation is in financial markets. The largest U.S. banks and brokerage houses are being shored up by capital infusions from state-owned sovereign funds based around the world. Excess capital has accumulated in countries of the Middle East (thanks to oil revenue) and in China, South Korea and Singapore (thanks to foreign trade generally).

Will this shift in ownership result in actions detrimental to national interests? It seems unlikely, since the intention is to earn healthy returns on funds invested. Moreover, it gives other nations more of a stake in ensuring that the industrialized nations continue to prosper. It will also help to keep interest rates lower than they might otherwise need to be.

As a final note, another (recent) example of globalization is Coca-Cola’s acquisition of a giant fruit drink company in China. This is an example of China taking the right approach in letting the rest of the world in. Japan, nominally the world’s second largest economy, is essentially closed. The latest fallout has been the resignation of that nation’s Prime Minister amidst a stalemate in parliament and indications that reform is grinding to a halt.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

For CanaData’s latest put-in-place investment forecasts, see Market Insights story dated August 11, 2008.

» View all comments (0 total comments)

Post Your Own Comments 

» Not a member? Register now to become one. Otherwise, login to post your comments on this article.

11/20 - Labor Markets in a Recession − Production Workers to Take a Pasting

11/17 - The Most Serious Letter in the Alphabet

11/14 - Canada’s Construction Starts have Underperformed in 2008

11/11 - What President-elect Barack Obama will mean for Canada

11/10 - The Wise Old Rooster

» Back to Alex's Blog