stats
globeinteractive.com: Making the Business of Life Easier

   Finance globeinvestor   Careers globecareers.workopolis Subscribe to The Globe
The Globe and Mail /globeandmail.com
Home | Business | National | Int'l | Sports | Columnists | The Arts | Tech | Travel | TV | Wheels
space


Search

space
  This site         Tips

  
space
  The Web Google
space
   space



space

  Where to Find It


Breaking News
  Home Page

  Report on Business

  Sports

  Technology

space
Subscribe to The Globe

Shop at our Globe Store


Print Edition
  Front Page

  Report on Business

  National

  International

  Sports

  Arts & Entertainment

  Editorials

  Columnists

   Headline Index

 Other Sections
  Appointments

  Births & Deaths

  Books

  Classifieds

  Comment

  Education

  Environment

  Facts & Arguments

  Focus

  Health

  Obituaries

  Real Estate

  Review

  Science

  Style

  Technology

  Travel

  Wheels

 Leisure
  Cartoon

  Crosswords

  Food & Dining

  Golf

  Horoscopes

  Movies

  Online Personals

  TV Listings/News

 Specials & Series
  All Reports...

space

Services
   Where to Find It
 A quick guide to what's available on the site

 Newspaper
  Advertise

  Corrections

  Customer Service

  Help & Contact Us

  Reprints

  Subscriptions

 Web Site
  Advertise

  E-Mail Newsletters

  Free Headlines

  Globe Store New

  Help & Contact Us

  Make Us Home

  Mobile New

  Press Room

  Privacy Policy

  Terms & Conditions


GiveLife.ca

    

PRINT EDITION
This is no time for investor panic
space
Trying to dip in and out of markets to stay one step ahead of trade clashes is a mug's game and investors shouldn't do anything rash - yet
space
By IAN MCGUGAN
  
  

Email this article Print this article
Tuesday, July 10, 2018 – Page B8

Many investors seem worried about the devastating consequences of a global trade war.

But before surrendering to pessimism and selling everything in your portfolio, you may want to consider the surprisingly matter-of-fact conclusions from economists who have pondered such a potential conflict.

If nothing else, the forecasters can help quell fears that we're teetering on the brink of another Great Depression. Many people have drawn comparisons between the current surge in protectionism and the similar wave of nationalism in the 1930s. However, even an all-out trade war would probably result in a downturn more like the 1973 oil crisis or the early 1980s recession than the Dirty Thirties or the financial crisis, according to a Capital Economics report published on Monday.

Granted, the pain from a trade war would be felt unequally. Among the hardest hit victims would be Ontario factory workers. They have already endured a miserable decade and, in a worst case, they could be smacked yet again by the imposition of tariffs on Canadian-made cars. But even accounting for that pain, the overall impact of auto tariffs on the Canadian economy would be modest, according to a recent Toronto-Dominion Bank analysis.

The key message here is that investors should not do anything rash. Trying to dip in and out of markets to stay one step ahead of possible trade clashes is a mug's game. To see why, consider some key numbers: 25 PER CENT It's important to put the current risks in perspective. Royal Bank of Canada economists place a 25-per-cent probability on an outright termination of the North American free-trade agreement. They see another 15-per-cent chance of an outcome in which the United States wins in some decisive way.

However, the RBC analysts still tilt toward optimism. They believe there is a 60per-cent chance of an outcome in which Canada, the United States and Mexico compromise on a mutually agreeable new deal or the existing NAFTA agreement simply gets renewed with no significant changes.

The market seems to be even more optimistic. The S&P/TSX Composite Index is trading at nearly exactly the same level at which it began the year. It doesn't appear ruffled by all the fire and fury over the NAFTA talks.

Whether you prefer the RBC probabilities or the even deeper state of calm implied by the market, the conclusion is that we're still a long way from an emergency scenario.

2 PER CENT TO 3 PER CENT

But what happens if the worst case comes to pass, NAFTA gets shredded and the world collapses into an all-out trade war where every government around the world imposes blanket tariffs of 25 per cent on all imports? In that ugly scenario, world output would fall 2 per cent to 3 per cent, according to Capital Economics.

Such a decline would be painful, but it would be more like the early 1980s recession than the Great Depression. "Once the world has adjusted to the higher tariff levels, it should return to a trend growth rate," Capital Economics says.

To be sure, there would be some inevitable losses in efficiency because of tariff barriers, which could drag the trend growth rate down to 3.3 per cent a year instead of 3.5 per cent. But the overall impact would be limited. By 2025, world GDP in the trade-war scenario would be around 3 per cent shy of where it would stand in a world that sidesteps conflict, Capital Economics says. This loss of potential output would be sad and frustrating, but hardly catastrophic.

NO. 1 Of course, a global trade war wouldn't hit everyone the same. By Capital Economics' math, Canada is the No. 1 potential casualty simply because so many of our exports are tied to the U.S. market.

So how big a hit would Canada suffer?

In an analysis published last month, Brian DePratto of the Toronto-Dominion Bank considered possible outcomes in the unlikely event that the United States decided to go full protectionist and levy tariffs of 10 per cent on auto parts and 25 per cent on vehicles. In that case, Canada would suffer a modest pullback, in which economic growth in 2019 would fall by half a percentage point and the economy would stagnate for two quarters, he estimated.

Mind you, the national figures hide the extent of the pain that Ontario would feel.

One in five factory workers in the province could lose their jobs. "Such a shock would be enough to erase all of the gains (across all industries) in employment that Ontario experienced over the past two years," Mr. DePratto writes. On top of that, the loonie could depreciate by 8 per cent to 15 per cent, raising the price of imports for all Canadians. And spillover effects from layoffs could hit housing markets and retail sales, particularly in the Golden Horseshoe area, where much of the country's auto industry is clustered.

Still, the country would not be devastated. If Washington imposed auto tariffs, Canada's gross domestic product would likely shrink 1.3 per cent and unemployment would rise 0.8 percentage points, but most of the lost ground would be made up within two years, leaving the level of output only 0.2 percentage points below the business-as-usual scenario, TD estimates.

10 PER CENT

Investors should remember that the Canadian stock market is not the same as the Canadian economy. While the auto sector could be hit hard by potential tariffs, the big automakers aren't listed on the Toronto exchange. In fact, industrial stocks make up only 10 per cent of the S&P/TSX Composite. They're far less significant than the financial and energy sectors.

This isn't to say that the market would simply ignore a trade war - no doubt banks and oil companies would also feel the effects. But it's likely that conflict would not be as catastrophic as many investors think. And, of course, the balance of probabilities still argues we won't have a trade war at all.

So take a deep breath and calm down.

At least for now, this is not a time for panic.


Huh? How did I get here?
Return to Main Roy_MacGregor Page
Subscribe to
The Globe and Mail
 

Email this article Print this article

space  Advertisement
space

Need CPR for your RSP? Check your portfolio’s pulse and lower yours by improving the overall health of your investments. Click here.

Advertisement

7-Day Site Search
    

Breaking News



Today's Weather


Inside

Rick Salutin
Merrily marching
off to war
Roy MacGregor
Duct tape might hold
when panic strikes


Editorial
Where Manley is going with his first budget




space

Columnists



For a columnist's most recent stories, click on their name below.

 National


Roy MacGregor arrow
This Country
space
Jeffrey Simpson arrow
The Nation
space
Margaret Wente arrow
Counterpoint
space
Hugh Winsor  arrow
The Power Game
space
 Business


Rob Carrick arrow
Personal Finance
space
Drew Fagan arrow
The Big Picture
space
Mathew Ingram arrow
space
Brent Jang arrow
Business West
space
Brian Milner arrow
Taking Stock
space
Eric Reguly arrow
To The Point
space
Andrew Willis arrow
Streetwise
space
 Sports


Stephen Brunt arrow
The Game
space
Eric Duhatschek arrow
space
Allan Maki arrow
space
William Houston arrow
Truth & Rumours
space
Lorne Rubenstein arrow
Golf
space
 The Arts


John Doyle arrow
Television
space
John MacLachlan Gray arrow
Gray's Anatomy
space
David Macfarlane arrow
Cheap Seats
space
Johanna Schneller arrow
Moviegoer
space
 Comment


Murray Campbell arrow
Ontario Politics
space
Lysiane Gagnon arrow
Inside Quebec
space
Marcus Gee arrow
The World
space
William Johnson arrow
Pit Bill
space
Paul Knox arrow
Worldbeat
space
Heather Mallick arrow
As If
space
Leah McLaren arrow
Generation Why
space
Rex Murphy arrow
Japes of Wrath
space
Rick Salutin arrow
On The Other Hand
space
Paul Sullivan arrow
The West
space
William Thorsell arrow
space





Home | Business | National | Int'l | Sports | Columnists | The Arts | Tech | Travel | TV | Wheels
space

© 2003 Bell Globemedia Interactive Inc. All Rights Reserved.
Help & Contact Us | Back to the top of this page