Lacklustre year ahead for Canadian economy but recession is avoidable: CIBC

Dec 8, 2011

Interest rates to stay low through 2013 as fiscal tightening hits global growth

TORONTO, Dec. 8, 2011 /CNW/ - Canada will feel the squeeze of a slowing global economy in 2012 but can avoid recession as continued low interest rates support business investment and cooler inflation gives consumers more spending power, notes a new report from CIBC World Markets Inc.

"As an open economy, Canada can't help but feel the disappointment of a barely half-speed world," says Avery Shenfeld, chief economist at CIBC in a new economic forecast.  "Excepting Europe, we're not destined for recession, but global growth will barely top three per cent next year, and 2013 won't be a whole lot better, well below the bounteous five per cent pre-recession pace."

The countries in Europe that have been first to tackle budget deficits through tax hikes or spending cuts "have paid the price in growth," notes Mr. Shenfeld.  That same malaise is spreading to other European countries, he says, and its echo will be felt as governments pull back from stimulus in North America.

Even three per cent global growth is dependent upon aggressive action being taken to keep Europe's downturn from worsening, he says.  Other risks to growth include budget cutting in the U.S. if it's done "too hard, too soon", and whether a decelerating China achieves a soft landing.

In Canada, Mr. Shenfeld says growth will pack a lighter punch at roughly a two per cent pace in the next two years. This should keep the jobless rate stuck at near current levels and the Canadian economy dependent on low rates even longer. "2012 is on tap to be a lacklustre year for the Canadian economy. While the Bank of Canada had earlier warned about rate hikes in 2011, the next leg of a tightening cycle looks unlikely to be required before 2014, as the economy continues to need exceptionally low rates to stay above water."

In addition to continued low interest rates, business spending, particularly on construction and equipment, should help guard Canada against recession risks. "Spending in energy, aluminum smelting, shipbuilding facilities and other private sector megaprojects will provide at least some antidote to the retreat underway in public sector capital spending as the recession's stimulus is wound down."

Meanwhile, Canadian consumer spending is expected to brave the economic headwinds next year as lower interest rates depress savings, and inflation becomes more in line with soft wage growth, says Mr. Shenfeld.  With Canadians wary of adding to their household debt, spending expansion will more likely be supported by consumers tapping into savings rather than credit, he says. These factors "should leave consumption advancing at a moderate 1.9 per cent pace in real terms in 2012."

Shaky global conditions are also likely to continue weighing on sentiment for the resource-linked Canadian dollar, says Mr. Shenfeld.  This will create room for the loonie to "slide further in the coming months, until the crisis fires in Europe are quenched." He's forecasting the loonie will fall to 92 cents U.S. by early summer.  A softer dollar will provide Canadian exporters some relief though Mr. Shenfeld notes they should be prepared for a return to parity by year end on diminishing global crisis fears.

As for Canadian real estate, a sluggish economy will likely lead to housing prices leveling off over the next two years, says Deputy Chief Economist Benjamin Tal. And "further out, the most likely scenario is that eventual increases in rates will lead to a modest decline in prices, in the magnitude of 10-15 per cent."

Mr. Tal adds that "a flattening in house prices in the next year or so is a necessary condition for such a soft lending scenario" and will pave the way for a healthier housing market later in the decade with market fundamentals likely caught up with prices.

In a separate forecast note also out this week, Government Strategist Warren Lovely says the pain of lacklustre growth in Canada won't be evenly shared across the country.  "Regional imbalances in economic and fiscal performance have long been a part of the provincial scene, and the coming year should be no different. Powered by robust business investment and confident consumers, Canada's resource-rich provinces notched the speediest expansions in 2011, and we expect Alberta and Saskatchewan to remain firmly atop the provincial growth charts in the year ahead."

Meanwhile, Ontario and Québec are likely to see growth below two per cent in 2012 given their correlation to the U.S. economy.

Yet while Canada's economy does not look infallible next year, it is better positioned than most on the jobs front, and also housing, natural resources, business confidence, banking strength and demographics, says Mr. Lovely.  Relatively strong domestic fundamentals will continue to attract international investors to Canada, enabling governments to more cost-effectively fund their borrowing programs. "With the ranks of AAA-rated credits thinning out, market confidence in a European solution understandably shaky and political disharmony in Washington, Canada should continue to stand out for all the right reasons. Look for international capital to seek out Canada in size during the year ahead."

Copies of the report mentioned in this release are available here:

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For further information:

For further information, please contact: Avery Shenfeld, Chief Economist, CIBC World Markets Inc. at (416) 594-7356, avery.shenfeld@cibc.ca; Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc. at (416) 956-3698, benjamin.tal@cibc.ca; Warren Lovely, Government Strategist, at 416-594-8041, warren.lovely@cibc.ca; or Tom Wallis, Communications and Public Affairs at 416-980-4048, tom.wallis@cibc.ca.


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