New Normal, or Not?

'Dismal' is no longer the exclusive moniker of economists. The label can now be attached to the popular media, to pundits of all stripes, maybe even to those in the religious realm with an apocalyptic bent – and increasingly, to the general public. It seems that everyone is resigned to a ‘so-so’ world that has failed to get decent economic lift seven years beyond the Great Recession. Moments of strength, and the upbeat predictions they gave rise to, have repeatedly been dashed by abrupt reversals, thinning the ranks of the optimists considerably. So is this it – are we all now resigned to perpetually low growth?

See that? It’s a smile curling up on the mouths of the original ‘dismalians’ – the ones who said early on that we were entering a phase of gloom. They’re looking good at the moment, as the data seem to put a lock on their logic. And their ranks are swelling as the low-growth trend continues. This is the WYSIWYG crowd, the ones that see the data, weigh it against the arguments, and agree that this is all we are going to get. Of all arguments about the state of the world economy, this is perhaps the easiest to make. If the data go in the same direction for long enough, just call it a ‘new normal’.

Proponents have a lot of grist for their grief. Many point to things like fiscal deterioration, the distortions created by exotic monetary policy, banking woes and the ensuing re-regulation, demographic decline, attitudes of the new generation, hangover fears from the recession and the like, as explanations for the slow-go world we are in. It pre-supposes that these constraints are enough to stymie the economic cycle. Truth is, we in Canada have seen it all before in the sluggish post-recession recovery of the 1990’s, complete with the fancy ‘new normal’ explanations – only to see a huge rebound from the late-1990s to 2008. A key question is, can the world pull off what an isolated country did?

That’s one view. Others – ourselves included – have held that the ups-and-downs of the economic cycle are still intact, with one significant difference: they are wildly exaggerated this time – in fact, in Biblical proportions. It’s almost as if we had the seven fat years ahead of the recession, and seven lean ones afterward. Egypt saw it coming, and Joseph engineered cyclical smoothing millennia before Keynes. And this likely enabled them to get on their feet afterward. In our case, though fundamentals are primed and ready, recent growth is our worst enemy; resignation or fear could easily condemn us to a ‘psycho-cycle’ of low growth.

There’s a third possible explanation. At the same time, there is a technical revolution going on. Yes, it has been with us for decades; but crisis does something to accelerate the application of technology in ways that enhance profits in down-times. Perhaps that’s why companies complain that they can’t find the right kinds of skilled workers, when there seem to be an abundance of lesser-skilled ones. And why there’s a growing wedge in the incomes of the two groups that has the world up in arms about inequality. Brexit and the US election are just two of many manifestations of this worldwide neo-frustration.

Elements of all three views are conditioning current global growth, and fueling the popular existential debate on the economy’s future. What’s more important is what it means for business activity. Caught in this intellectual but very practical conundrum, businesses the world over are in a quandary about investing. Typically, firms wait until order books fatten up to the point of crisis, then invest to keep up with activity. When growth fails to ignite, businesses can adjust, tweak, find efficiencies and such, without the normal big, splashy outlays. Profits are there, but there’s a great hesitation to part with them for new projects.

It might be safer to follow the crowd, but it’s equally likely that the herd mentality of hesitation keeps funds from flowing to good opportunities. It is a tricky environment, but it doesn’t mean that savvy companies should stop sniffing the globe for good deals and opportunities that in different circumstances wouldn’t even be a possibility. If fundamentals are lined up the way we think they are, there could be more such opportunities than ever.

The bottom line? Regardless of the state of the world economy, there are always opportunities. Just ask the Canadian exporters that are enjoying double-digit growth this year, and not for the first time. In everyone else’s investment hesitation, it’s time to seek and find what they’re not seeing.

This has been written by By Peter G. Hall, EDC Vice-President and Chief Economist.