Canada’s economy is facing muted growth prospects through 2011 as a recessionary hangover continues abroad and headwinds emerge at home, according to a new report from CIBC World Markets Inc.
“The Great Recession that shattered global growth in 2008-2009 is now water under the bridge but the Great Disappointment of a sub-par global recovery will be with us for a good while longer,” says CIBC’s Chief Economist Avery Shenfeld in a wide ranging forecast report.
With signs pointing to a softening in many sectors of the Canadian economy, Mr. Shenfeld has cut his target for economic growth to 1.9 per cent in 2011. Contributing factors include a downbeat export picture affected by a sluggish global recovery and the competitive challenges of a strong Canadian dollar. Other concerns are falling house prices and reduced use of credit that could lead Canadian consumers to trim spending growth.
With growth sitting below two per cent, Mr. Shenfeld expects “the Bank of Canada will wait until spring before renewing a very gradualist path to normalcy in interest rates.” That pause would slow capital inflow and allow a huge trade deficit to take the Canadian dollar down to 92 cents U.S. over the next six months before recovering when rate hikes resume later in 2011.”
CIBC’s forecast for U.S. GDP growth has also been scaled back, to 2.6 per cent this year and a “paltry” 1.8 per cent next year. Despite the potential for tax cuts and modest growth initiatives, the U.S. “economy will still see a major drag on growth, intensifying early next year from the loss of earlier stimulus measures.” However, things should begin to improve in late 2011 as fiscal and consumer headwinds lessen, while the overnight interest rate should hold at zero until at least the second half of 2012, the report notes.
Meanwhile, overseas economic growth is looking lopsided, the report states.
In Asia, emerging economies “still have room to grow their domestic consumer base, with households not having come through a borrowing binge, and a long building period ahead to fully modernize private and public infrastructure. But they will still feel some of the chill as demand for their exports decelerates,” says Mr. Shenfeld.
CIBC forecasts GDP growth in China to tip the scales at 10.1 per cent this year, and 9.3 per cent in 2011.
By contrast in the Eurozone, growth is showing signs of slowing after a burst in the second quarter.
“The credit crunch is still likely to be a restraining factor,” say CIBC economists Peter Buchanan and Krishen Rangasamy. “That, together with a still-weak labour market, means that consumer demand should remain soft. Forthcoming austerity measures will also keep a lid on domestic demand, and renewed concerns over sovereign debt risks will weigh on business and financial market sentiment.” As a result, CIBC expects that the European Central Bank and the Bank of England will take time in raising interest rates.
Elsewhere in the report, Mr. Shenfeld cautions investors that the usual implications for bonds and equities given the outlook for slow growth may not apply this time. “Dividend yields are actually above 5-year bond yields, making dividend paying stocks that are well backed by cash earnings look, if anything, a bit cheap. Stock indexes may only creep modestly higher through 2011, but add in dividends and the return could readily surpass bonds,” he adds. “Barring renewed recession, it’s too late to pile onto the safe haven bandwagon.”
On commodities, the “sizzling climb” from the recession’s lows “appears to have run out of steam,” say Mr. Buchanan and Mr. Rangasamy, adding that a slowing U.S. industrial sector and weak global growth “suggest a continued horizontal ride for commodities over the next 12-18 months.” However, “potential upside exists beyond that as some of the forces restraining the U.S. and other industrial economies begin to ease.” Adding to the general volatility is rising index investment which means commodity prices follow the broad ebb and flow of investor sentiment more closely than they once did.
CIBC’s economists have revised their 2011 target for gold, forecasting that the precious metal will climb to US$1,400/oz.
“A solution to Europe’s debt problems remains elusive. While that’s a further near-term plus for safe-haven demand for the yellow metal, higher rates still pose a longer-term threat for gold, and central bank re-tightening will quench the rally in 2012,” say Mr. Buchanan and Mr. Rangasamy.
CIBC has also pared projections for both oil and natural gas on weakening growth and signs of ample supply. WTI is now expected to average US$77/bbl this year and US$75 next. And Henry Hub prices are expected to average US$5/MM Btu in 2011, before firming to $5.50/MM Btu in 2012.
The top base metal choice is copper, the report states.
“China accounts for about 40 per cent of global demand for the metal. Grid investment and plans to produce highly copper-intensive electric vehicles should keep demand there on a healthy rising track. Demand growth will approximate capacity additions in 2011, keeping global markets tightly supplied.”
The complete CIBC World Markets Inc. report is available at: http://research.cibcwm.com/economic_public/download/fsep10.pdf
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