Economic woes in the U.S. and Europe, slowing growth in China and heavily indebted domestic consumers are weighing down the economic outlook for Canada, according to Investment Executive’s survey of eight economists in the financial services sector.
At best, these issues will keep Canada’s economic growth moderate this year; at worst, serious setbacks in the U.S., Europe or China could push Canada toward — or into — recession.
According to the economists surveyed, growth in Canada’s gross domestic product should hover around a sluggish 2% this year and will be only a little stronger in 2013 — not enough to move the unemployment rate below 7%.
Inflation should be tame at around 2% for this year and next. Short-term interest rates are forecast to remain low this year and rise by about 100 basis points in 2013; long-term rates are predicted to rise by about 50 bps for 2013.
The Canadian dollar is expected to remain around par with the U.S. currency; oil prices are forecast to average around US$100 a barrel in both 2012 and 2013.
“[Canadian] households still have fairly uncomfortable levels of debt,” says Carlos Leitao, chief economist and strategist with Laurentian Bank of Canada in Montreal. Although consumers are likely to increase their spending this year, that will not be sufficient to give our economy new life.
China’s economy is slowing. The danger is in slowing too much, which would send resources prices downward. If China’s annual growth slips to 6% from about 9% this year, oil prices also could fall and drag Canada into recession. However, most economists surveyed assume that China will continue to grow.
Fiscal restraint from Canada’s provincial and federal governments, which are struggling to balance their budgets, also could dampen Canada’s economy. Ontario, for one, has a huge budgetary deficit, forecast at $16 billion for the fiscal year ending March 31, 2012.
But the economists disagree on how serious a threat fiscal drag will be. Lloyd Atkinson, an independent financial and economic consultant in Toronto, suggests much of Canada’s growth in the past few years has been fuelled by government spending at both the federal and provincial levels. As this stimulus is withdrawn, he foresees the economy remaining very weak.
However, Paul Ferley, assistant chief economist with Royal Bank of Canada in Toronto, believes this fiscal drag will be offset by continued growth in capital investment by businesses and healthier exports to the U.S., the latter of which, he believes, will grow by 2.5% this year and by 3% in 2013 — much stronger than the 2% and 2.2% average, respectively, expected by the other economists. Ferley foresees GDP growth in Canada of about 2.5% this year and in 2013.
In any event, the first half of this year is likely to be rocky for Canada’s economy, the economists suggest, with sluggish growth and declines in both oil prices and the C$ until concerns about Europe, the U.S. and China settle down. So, our economy probably won’t pick up steam until the second half of 2012.
This slow start is reflected in most of the economists’ expectations that short-term interest rates won’t start moving up until the second half of 2013. The economy also will continue to function on two levels — sluggish in Central Canada, where manufacturers have problems competing due the high C$, but healthy in the resources-rich regions.
Exports are an important part of Canada’s economy, equivalent to about 40% of real GDP, so slower demand elsewhere in the world can be a major drag on our economic growth. After years with a surplus in our current account — the trade in goods and services plus investment income flows — Canada now has a sizable trade deficit of around $50 billion this year. Aside from Ferley and Craig Alexander, senior vice president and chief economist with Toronto-Dominion Bank in Toronto, most economists surveyed by IE expect the current account deficit to be more than $40 billion in 2013. And that prediction assumes benign outcomes in Europe, the U.S. and China.
Europe is already in recession. Economists are assuming that the 17 eurozone countries will reach an agreement for dealing decisively with their sovereign-debt crisis and prevent the problem from spreading.
If such an agreement is not reached, the financial markets will remain in turmoil and a depression in the eurozone is almost certain, says Krishen Rangasamy, senior economist with National Bank of Canada in Montreal.
There’s no logical reason for the eurozone countries to fail to reach an agreement; the cost of breaking up the European Union and abandoning the euro would be astronomical. But, as Alexander says, politicians may refuse to accept reality because they don’t believe their constituents will accept it.
The U.S. is less of a risk because it is solvent. But political gridlock in Washington, D.C., means no agreement on a plan to reduce deficits and start paying down debt will emerge until after the next federal election, in November of this year. Economists are assuming that in the meantime, Congress will extend the payroll tax cuts and unemployment insurance enhancements scheduled to expire on Dec. 31, 2012. However such an extension is not certain; if it doesn’t occur, the U.S. will almost certainly go into recession.
And even if these cuts and enhancements are extended, the extension will likely be for just one year, warns Avery Shenfeld, chief economist at CIBC World Markets Inc. in Toronto. That means the cuts would end in 2013, which, when combined with the considerable fiscal restraint scheduled for that year, would keep the U.S. economy very weak. IE