Recovery chatter

Recent economic statistics show that Canada leads the major industrialized nations in economic growth, at just over 3% annually. That could have been good news for Canadians and for the Canadian mining industry, but turn away from the warm fire and look out the window, and the scene is much chillier.

This is a trading country after all, and our economic growth is tied to that of our trading partners. Not all is well among them.

The Japanese economy remains in recession, and it is widely feared that it will stay there for months to come. The consensus on Japan’s business climate is that sooner or later the country’s banks must take a haircut on their bad loans. Later will be worse than sooner, but either way, there is a long tunnel ahead.

A trial balloon from the Bank of Japan, suggesting it might buy some of the commercial banks’ equity holdings to provide them with more liquidity, sank dismally. Monetary stimulus is not working. Japan will not be a leader out of the present economic doldrums.

Europe is also stagnant, though economies there are growing slowly. A major retardant is the European Central Bank’s monetary policy, which is probably unnecessarily tight. The Bank probably has let the value of the euro become too much of an issue; by linking that with its own credibility, it has painted itself into a tight-money corner just when liquidity is the best medicine.

Over the past few decades, countries have taken turns being pilloried as the “Sick Man of Europe.” It was Britain for a long time, but that wore off after the Thatcherite revolution and the resurgence of London as an international financial centre. Italy’s large public debt made it the butt of some nasty comments for a while.

Now Germany, once the shining example of rational economic planning, is taking criticism for its inflexible labour market, the regulatory burdens faced by its industry, and — horror of horrors — its “entitlement culture,” which we presume means long statutory vacations similar to those enjoyed by many workers in North American auto plants and smelters.

The fact is there’s some structural weakness in most economies at the moment, which the global slowdown may have exposed but did not create. And one of the most worrying weaknesses is in the economy that’s supposed to keep the rest of us riding high: the United States.

A long bull run in the U.S. financial markets, which translated, at its end, to a market bubble, has been responsible for a massive destruction of capital. No economy, however fundamentally strong it may be, gets around an episode like that unscathed.

There have been some mitigating factors, thanks to continued consumer spending. And it is fortunate that real people (as opposed to investors) have an appetite for things like houses, cars, and refrigerators, rather than for bandwidth, market share, or positioning. Having seen the bubble go pop, the ordinary American went about his daily business and propped his country’s economy up quite admirably.

The reason for worry is that he can’t be leaned on forever, and business, which overextended itself in the good times, has not pulled its weight in creating wealth and growth.

Uncertainty surrounding world affairs, particularly the fear that war in the Middle East could send oil prices rocketing, has slowed the recovery, no doubt. But uncertainty is not what left the U.S. economy with a serious misallocation of capital.

The implication for those economies that rely heavily on U.S. markets is obvious; and no country needs a healthy U.S. economy more than its principal trading partner. The gap between Canadian and U.S. growth is not an unalloyed blessing.