“We’re glad that’s over” was the mantra in financial markets on the last trading day of 2008. As if a simple shift in the calendar would stem the flood of bad news that surged last fall. Wishful thinking got a further boost from upbeat market results in the first few business days of 2009. Unfortunately, the world economy’s poor fundamentals ruled the day, eating up the gains by the end of the first week. Last fall’s economic and financial turmoil was no transitory tremor; it was a full-blown quake, and market watchers are still assessing the extent of the damage it caused.

Like any big quake, for this one, the pressures were building for some time. Economic excesses built up in the US economy over the last seven years. Given the US consumer’s spending clout, these excesses were exported all over the world. Economies became used to excessive exports, and built their economies to service the breakneck growth pace. It has all come to a sudden end, and everyone is feeling it. So were last fall’s big jolts enough to bring things back to normal?

Hardly. Seven years of excesses don’t just evaporate in a few weeks. What is unfolding at the moment is a chain of economic events that began in mid-2006. That’s when US markets first realized that there were far more houses in the market than US consumers really needed. This set off a sharp drop in real estate prices, a recoil of construction activity and revealed a deluge of toxic mortgages on the books of leading world financial institutions. No longer able to cash in on swollen home equity, the mighty US consumer reined in spending, and global demand felt the pinch. Around the world, employment is now reacting – promising punishing second-round effects on demand and financial markets.

Put simply, the bad news is not over. Markets will continue to react to revelations of weaker growth in emerging markets, and the effects of higher unemployment worldwide. Savvy planners need to prepare for persistent pessimism, and constrained access to capital. How long will it last? A snappy, 2002-style rebound is highly unlikely. This time around, the excesses are just too great, and will take time to work down. Take US housing markets, for example. If the current surplus is worked off at the same speed it grew, it could be the second half of 2010 before balance is restored. Other indicators suggest that hopes for a rebound in the latter half of 2009 are faint. Not an upbeat story at all, and Canada’s exporters are on the front lines of the battle.

So we’re in for a longer wait than usual. Are there any opportunities? Clearly prospects are more limited, especially in Canada’s traditional markets. But outside of the comfort zone, exciting things are still happening. Emerging market growth will slow, but will still outpace our traditional international stomping grounds, and they need what we sell. In addition, sluggish conditions have broken open the public piggy bank, and those able to deliver goods and services to massive public infrastructure projects in short order are likely to be in high demand this year. In addition, Canadian exporters will now have a lower dollar, and substantially weaker primary input costs.

The bottom line? 2009 will be tough, the risks will be higher, and exporters can’t rely on traditional markets. Survival likely requires breaking new ground. Can we do it? In normal times, necessity is often the mother of invention. But crisis is the mother of transformation; heeding this adage will be critical to short-term success.

Peter Hall, Vice President and Chief Economist
Export Development Canada
Ottawa, Ontario