Inclusive, Balanced, Sustained Growth in the Asia-Pacific

5. North America: Achieving Sustained Growth

96 Wendy Dobson 5 North America: Achieving Sustained Growth Wendy Dobson I. HOW THE CRISIS AFFECTED NORTH AMERICA The North American economy depends heavily on what happens in the United States. Canada and Mexico were negatively impacted by the decline in U.S. imports and rising unemployment but both countries had sound macroeconomic fundamentals. No Canadian financial firm failed and Canadian banks were rated as the world’s soundest. In the United States, in contrast, the adjustments required in private and public saving and the consequent impact on real economic activity were widespread and large. The extent and timing of necessary financial regulatory reforms also contribute to considerable uncertainty about the path of a sustained recovery. The analysis that follows considers alternative scenarios and discusses five policy changes that would contribute to a sustainable outcome. Sound macroeconomic positions in Canada and Mexico not only gave governments room to take aggressive recovery measures but each government also used the stimulus programmes to bring about structural North America: Achieving Sustained Growth 97 changes to promote long-term growth. Both invested in physical infrastructure programmes and Canada expanded investments to upgrade its stock of human capital as part of the development of its knowledgebased economy. Although in 2009 Mexico suffered the largest contraction in real GDP among the emerging market economies (Table 5.1) both countries are expected to weather the recession successfully and to return to sustainable growth paths in 2010. This is apparent in the projected reductions in their structural fiscal deficits; the IMF expects that while Canada’s fiscal deficit of –3.4 per cent of GDP in 2008 will extend into 2009 the underlying structural balance will be small (–0.9 and –0.8 per cent of GDP in 2009 and 2010, respectively). Mexico’s fiscal balance was –1.4 and –0.3 per cent of GDP in 2008 and 2009, respectively, and will return to –0.4 per cent of GDP in 2010. It is also apparent in inflation projections; Canada’s CPI inflation is expected to remain below 2 per cent while Mexico’s is expected to remain in line with recent levels. Uncertainties about U.S. prospects are expected to contribute to financial market volatility in the next few years unless credible actions are taken to restore large internal and external imbalances to sustainable positions. These have worsened as the administration fights the recession and foreign investors may lose confidence at some point in the future and refuse to finance further U.S. borrowing. In the short term, economic activity appears to be stabilizing. Many forecasters expect real growth to return to 3 per cent by 2011 (Table 5.1) on the grounds that deep recessions are usually followed by sharp and fast recoveries. But this recession is atypical in that its causes lie in the financial sector where there is now a deep aversion to risk by both borrowers and lenders. Moreover, the macroeconomic policy response has been unprecedented and large adjustments will be required in both fiscal and monetary policies to restore them to sustainable long-term paths. II. PROSPECTS FOR RECOVERY There is thus considerable uncertainty about whether the recovery will be weak or whether organic growth will materialize more quickly than expected and the large stimulus package will not be withdrawn in time, igniting future inflation. Each concern has a credible basis. Withdrawal of stimulus too soon would nip recovery in the bud. The back-end loading of most public spending programmes means they will affect economic activity 98 Wendy Dobson TABLE 5.1 Real GDP, Consumer Prices and Current Account Balances, Canada, Mexico, United States and China, 2008–2010 Economy Real GDP (annual % change) Consumer Prices Current Acct Balance (annual average change) (% of GDP) 2008 2009 2010 2011 2008 2009 2010 2008 2009 2010 Canada (IMF) 0.4 –2.3 1.6 2.4 0 0.5 0.6 –0.9 –0.7 Mexico (IMF) 1.3 –7.3 3.0 5.1 4.8 3.4 –1.4 –2.5 –2.2 US IMF 1.1 –2.6 0.8 3.5 3.8 –0.9 –0.1 –4.7 –2.8 –2.8 OECD 1.1 –2.8 0.9 –4.7 –2.8 –2.4 Cline1 (a) 1.1 –2.6 1.9 3.0 –4.7 –3.1 –4.5 (b) 1.9 3.0 –4.7 –3.1 –4.5 China IMF 9.0...