Highlights

    • The latest indicators show the world economy off to a robust start in 2010 and point to continuing vigour. Beijing has begun to rein in Chinese credit expansion in response to surprisingly strong growth and soaring imports and exports.
    • Despite a disappointing December employment report, the U.S. economy is headed in the right direction. Consumers have entered a virtuous circle of deleveraging, in which a savings rate in the neighbourhood of 5% allows growth in consumer spending in tandem with reduction of household debt. We continue to expect U.S. growth of 3.4% in 2010.
    • Canada is well ahead of the U.S. in the recovery of its labour market. Jobs in services rose to an all-time high in December and the aggregate wage bill showed strong growth in Q4, confirming that domestic demand will have legs. We are raising our forecast of Canadian growth to 3.1% in 2010.

    World: Surprising resurgence of trade

    The latest indicators show the world economy off to a robust start in 2010 and point to continuing vigour. Beijing has begun to rein in Chinese credit expansion in response to surprisingly strong growth and soaring imports and exports. The news from the world economy is upbeat. Leading indicators for the OECD and BRIC countries show spectacular momentum, eclipsing all readings of the previous cycle. The world purchasing managers index, a gauge of global manufacturing strength, rose in December to a 44-month high. Such vigour will no doubt oblige the IMF to revise up its global growth forecast.

    The oomph of the world trade rebound has surprised even Beijing. Chinese imports rose a blistering 21% in December. On a seasonally adjusted basis they are now 8% above the previous peak and 93% above the January low. Exports are also up strongly and are close to the 2008 peak. The combination has driven Chinese growth at a faster-than-expected pace.

    Beijing has responded by starting to normalize credit expansion. In the first 11 months of last year, China lent a cumulative 9.21 trillion yuan compared to 4.15 trillion in 2008. In mid-December 2009, the government guidance to banks for 2010 was on the order of 7.5 trillion yuan. In addition, Beijing raised the bank reserve requirement half a point last month, to 15%. Stiffer measures are possible but will probably wait until the second half of the year.

    China’s one-year lending rate is currently 5.31%, lower than during the Asian crisis. The current rate of growth will oblige the central bank to raise its policy rate this year to mop up liquidity. That said, China is far from adoption of a restrictive monetary stance. Any rate rise would be aimed more at forestalling bubbles than at slowing the economy.