by Gérard Bérubé
Do you foresee an end to the current period of economic growth, which just turned 10 years old?
MC There’s no such thing as a regular business cycle, and especially no such thing as a standard length. The current cycle beats the previous US economic record of 120 months of growth but Australia – whose last recession ended in 1991 – is in its 334th month of growth! And, it looks like it will take a significant event (or events) to end that. It’s true that the US is experiencing a slowdown, with 2% growth rates instead of 3%. Given that the country is at full employment, its ability to generate growth depends on productivity gains. But, with the current low interest rates, productivity gains, and a dynamic labour market, there is nothing on the radar to predict the end of this cycle.
The other key element is China, whose economy has been slowing down in recent years due to several factors, including debt. Preventing its debt from increasing too rapidly would inevitably lead to collateral damage. However, the measures implemented to date are yielding the desired results, and the economy has caught up. Now, in order to deal with its demographic challenges, China must focus on innovation and productivity. While these do not deliver 7% or 8% growth rates, they nevertheless allow the economy to grow at a more reasonable rate. So, we have two economic drivers that need to maintain their momentum. And, fortunately, there is no foreseeable incident that could lead us into a recession.
JDS For the past five years, the economies of major economic centres around the world have been driven by innovation research. Innovation activities such as AI have been the primary drivers for those economies, driving foreign direct investment into those markets. The centres that will emerge as the winners in the next five years will be those that convert their economies from innovation research alone to actual commercialization of those innovations in their markets: things like getting autonomous vehicles, really moving forward with smart cities and technology to address climate change. Our business community believes that, if you want to win, if you want to be in an economy that’s growing, where jobs are being created, the focus is much more on “how do you convert to the new economy?”
Do the central banks have room to manoeuvre to deal with a cyclical slowdown?
MC This is a big problem. Very few of the world’s central banks have tried to normalize their monetary policy. European banks still have negative interest rates. The United States had just started to normalize its monetary policy when the Federal Reserve hit the Pause button. Given where we are at in the economic cycle, we still have unusually low interest rate levels.
This means that they have not been building up the necessary cushion. Japan and Europe have no room for monetary adjustments and the US very little. The day when we need to rely on monetary policy, it will let us down. However, it’s not on the radar in the coming months or even in the coming quarters.
JDS It’s an excellent question, but it’s not a central bank situation. It’s not central bankers that need to be involved, it’s all levels of government. We need to solve for the regulatory and operating environments to make sure we’ve got investments in the right enabling infrastructure – like the decisions we have to make on 5G. I believe it’s our ability as economic zones to move into these new areas that will foster and stimulate growth. It’s a far more actionable and far more urgent issue than trying to think about central banks and recessions. I’m happy to talk about the trade and growth market implications of what’s happening with our relationship with the US and China and, yes, in spite of the noise, there’s still good business being done. As I said, our business community’s goal is to win in the next five years.
What can you say about current asset values?
MC Worldwide, stocks are expensive right now, but that varies somewhat by country and by sector. US stock market values are high compared with the historical trend. This reflects where we are in the cycle, but it also points to extraordinary monetary support. As part of quantitative easing, the Federal Reserve injected a massive amount of liquidity into the financial markets, so key rates remain very low and inflation is below 2%. This is not just a matter of corporate earnings outlook but also the abundance of liquidity and low interest rates.
We must also acknowledge that stock prices are anticipating a US-China agreement, as such a deal makes not only economic but also political sense. Donald Trump is looking ahead to the 2020 election and cannot afford a market correction. If there is a trade war, a global recession is a distinct possibility.
What is the mood among business people right now, and what are their expectations?
JDS Politicians are feeling a great deal of pressure about the parts of their economies that are not connected to global trade. But a lot of work is being done to help companies develop an export strategy and to identify priority growth markets for them outside Canada. So, trade is happening. Even during government-to-government disputes, if you can solve another country’s problem, there’s always an opportunity to do business.
It’s all about understanding which markets need the solutions your business community can provide. One thing our Canadian federal government has done very well – both the Conservatives and now the Liberals – is to move ahead on trade agreements. It has opened up unprecedented preferential market access for us, so we now have more market access than any other country. It’s now up to the business community to take full advantage of that. The current tariff situation with the US is just ridiculous! We are hearing as much distress in the States over these tariffs as we are expressing in Canada, so there is a growing grassroots movement right now that is going to put pressure on US politicians to get this resolved.
What should we think of all these trade tensions? Is there a limit to how much we can take?
MC The most disturbing thing about it is that it’s become an underlying trend. We had a commercial phase characterized by open markets, where everyone lined up, and where countries basically agreed on a common model. This general unanimity was the basis for many international reforms and agreements and is what led to the construction of value chains based on each country’s specific situation. This openness lowered prices and costs and increased productivity, thereby benefitting consumers and businesses alike.
Today, we are witnessing a backlash, a return to protectionism coming from the United States, which is the hub of the entire system. Long-standing trade regulations are now called into question, and the United States is choosing bilateral agreements and threats as a negotiating tactic. In a broader sense, globalization can only move forward, but all of this is on shaky footing with the return of the US-China geopolitical and technology rivalry, and with Europe on edge as its dream of quasi-federation recedes. Given all this, it’s not surprising that countries should turn inwards. Soon we will be talking about stagflation, and this is not a good thing.
JDS There’s a tremendous amount of back-and-forth going on right now, concerning opportunities for their companies to be more active in our market and for our companies to be more active in theirs. Trade agreements offer preferential access and help create a government-to-government relationship but, quite frankly, there’s a lot that can be accomplished on the ground. There’s a huge amount of interest in continued engagement on this topic.
What threats do you see on the horizon?
MC A major geopolitical threat is looming that will have unforeseeable consequences. In countries around the world, everything depends on the outcome of the upcoming elections and what political leaders will be chosen. The current divisions will only grow deeper, and the current tensions along with them.
JDS The big one is the ability of large economic zones to convert to the new economy and to commercialize current research, because that’s where that research will be monetized. It will represent a huge boost for those economies in terms of new skills development and new jobs.
How will the issue of climate change impact all of this?
MC We’re talking about protectionism, political threats, and the inability to normalize monetary policy. But climate change is and will be THE big issue. We know what’s going to happen. At least, we are beginning to realize the extent of global warming and its consequences. What we don’t know is how vulnerable the different economic sectors and players will be to the upcoming changes. Inaction is expensive, but so is the cost of action. And then there are investment issues. The current carbon price to achieve net-zero emissions is too low and has nothing to do with the price that will be set in the future. The costs of decarbonisation and avoiding the consequences of climate change are increasing. This will involve stress testing for higher carbon prices. However, all these challenges pale beside the issue of humanity.
[…] in the context of Canada?
JDS By bundling climate change and climate adaptation and pipelines all into the same ball of wax, our political classes did a real disservice to Canadians, because they’re separate issues. First, climate change must be addressed. But it’s not a local issue, it’s a global issue, and we need to be working with the global economy on that.
Second, climate adaptation is very much a local issue, it’s how we are preparing our economies and our urban plans for things like wildfires and flooding. It’s a matter of how we are using technology to be more anticipatory, to provide early warning systems, but also to try and develop mitigation strategies for communities that may be more frequently subject to these high-risk events.
The third piece is pipelines. For a country like Canada, more pipeline capacity is an absolute necessity. But more importantly, a tremendous amount of innovation research has been conducted by our energy sector, to the point where we are extracting resources in a more effective and environmentally efficient manner. Also, pipelines produce 77% less greenhouse gas emissions than transport by train. When emerging markets are moving up the demand curve for things like oil and natural gas, they can get off coal. Our ability to get Canadian oil to those markets is much better because of our high-tech extraction processes, and also the value of our culture and our economy as compared to some of the other major oil-producing markets around the world that aren’t paying attention to things like environmental and human rights issues.
Canadian businesses are trying to make sure that we do a better job of educating the public about the facts, about what are and what are not contributing factors. Climate adaptation is not discussed enough, and people point to the frequent incidents of wildfires and flooding as symptomatic of climate change. As it pertains to the energy sector, for example, we must start doing a better job of educating Canadians – and, indeed, the world – on our plans to go to a fully scaled green energy system in Canada over a period of time. In the meantime, in order to extract our fuel more efficiently, our energy sector is investing heavily in clean tech.