Canada’s exports and the world economy will continue to decline until the latter half of 2010, when Export Development Canada (EDC) forecasts that the global economy will find its feet and the recovery will begin to kick in.

“A general sequence of events, what EDC is calling the five waves of weakening, is underway and it gives light to the possible timing of a recovery,” says Peter Hall, EDC’s chief economist. “Working through the five waves is all about the economy getting back to balance.”

Hall made his comments Tuesday in a speech to the Toronto Board of Trade.

The five waves of weakening began with the collapse of the U.S. housing market in the middle of 2006, Hall says.

The second wave occurred when the housing market crash spilled into financial markets, manifesting itself in the fall of 2008 in the turmoil that pushed them to the brink.

The third wave was the successive sharp drop in global demand, which EDC notes is still very much underway.

The fourth wave is occurring now as employment losses are currently mounting, with significant layoff announcements at large multinationals becoming a daily event. When using past recessions as a guide, EDC believes that job losses in most economies have only just begun and expects much more as the year wears on.

Wave five has yet to manifest itself. “What remains to be seen is the impact of these significant job losses on an already-stressed financial sector, which is the fifth wave of weakening. Default rates are almost sure to rise through 2009, and the way the system copes with the fallout will likely, in a big way, determine the timing of recovery,” says Hall.

Hall adds that “although wave five will be a lot to deal with, the global economy will get a large well-timed boost as governments’ stimulus measures are felt. Specifically, the impact of current interest rate reductions will be substantial, and fiscal packages announced around the world, when spent, will be massive when measured against global GDP.”

“Given the timing of the announcements, the policy measures are likely to reach peak effectiveness at the same time as wave five reaches the beach, just in time to provide a substantial offset. How the outlook unfolds after that will depend, to a great degree, on the overall impact on confidence, which at present is extremely low.”

Putting it all together, EDC is forecasting a 1.3% decline in 2009 and 2.3% increase in 2010 in global GDP. “From the current vantage point, it is difficult to imagine that the global economy will begin to recover much before the latter half of 2010,” says Hall.

As a trading nation, Canada is caught up in the global downdraft. The generalized retrenchment of credit markets in the U.S., and the ensuing collapse of consumer demand and commodity prices are the greatest impact upon Canada’s export performance.

EDC is forecasting Canada’s exports will decline by 22% in 2009 before staging a comparatively modest 7.4% increase in 2010. In this context, EDC forecasts that Canada will see a 2% drop in GDP this year and 1.7% growth in 2010.

EDC’s forecast notes that those domestic sectors that benefited the most from the surge in global commodity prices will also be the ones that suffer most from the current downturn in prices, largely erasing the divergence that had emerged in recent years between resource-based exporters and exporters of manufactured goods.

EDC is forecasting that the Canadian dollar will remain lower, averaging US80¢ in 2009 and rising slightly to US81¢ in 2010.

EDC is also forecasting the price of crude to fall from an average US$100 a barrel in 2008 to US$47 a barrel in 2009 before rising to an expected average US$55 a barrel in 2010.

IE