Without key domestic economic drivers to shelter Canada from a continued weak global economy, GDP growth will slip to 1.7% in 2013, says CIBC.
“Having earlier tapped fiscal stimulus and a housing boom to shelter the economy from sluggishness abroad, the country’s ability to set its own course is now much more limited,” says Avery Shenfeld, chief economist at CIBC.
He adds, “Escaping economic mediocrity will depend on the kindness of strangers, with exports and related capital spending critical to Canada’s fate in 2013-14.”
Shenfeld has cut his global outlook for 2013 by two-tenths to 3% for the following reasons: “It’s too early to get the full benefits of policy stimulus in Asia; Europe is too stubborn to soften its fiscal drag enough and amplify ECB bond purchases; and Washington is too wedded to getting going on fiscal tightening stateside, if not the full fiscal cliff.”
While Chinese GDP could show improvement towards an 8% as early as Q4 of 2012, he says, it’s still not likely to have much of an impact on other economies.
This is because Chinese imports are currently showing no growth at all on a year-over-year basis. Shenfeld expects there to be a delay before crude oil and other resources rebound in price.
“The absence of a helping hand from abroad will leave Canada exposed,” he says. “Blaming temporary disruptions in energy production in Q3 for recent disappointments misses the point; GDP excluding resource extraction has also been decelerating, and the loss of home building momentum will offset greater oil output.”
“Our downgraded 1.7% growth forecast for 2013 will trail the U.S. pace and is three ticks slower than our last projection,” he adds, “Household debt burdens are keeping consumption bounded by the moderate growth pace for real incomes.”
“Governments also face leaner-than-expected coffers due to downward revisions to nominal GDP expectations, and will be introducing further spending restraints or tax hikes for fiscal 2013.”
In the near term, the bank says this environment will see investors maintain a risk-adverse attitude and see further downward adjustments to corporate earnings expectations.
Assets tied to global growth could be flat or see some first half slippage. This will also exert near-term downward pressure on the Canadian dollar.
Equities with less cyclical earnings profiles and well-backed dividends, as well as investment grade corporate bonds, will remain in favour for the next couple of quarters.
Optimism for 2014
Shenfeld says weak economic growth will not last forever.
“With its household sector healing, the U.S. should be positioned to lead the way towards a better year come 2014 if, as we expect, new fiscal tightening measures do not hit as deeply that year,” he says.
He also warns not to “underestimate the importance of the upswing underway in housing. As it gathers steam, it will drive related consumer spending and renovation, in addition to actual home-building jobs.”
He also expects China will be feeling the full benefit of its own policy easing and the improvement in U.S.-bound exports by 2014.
Even Europe, if it finally recognizes the need for both a softer hand in fiscal tightening and a more aggressive central bank, might at least register positive growth at that point.
“These developments will propel exports and resource sector capital spending in Canada, finally delivering the 2.5% quarterly growth rates the Bank of Canada has been expecting, or hoping for, in the past two years,” says Shenfeld.
“The brighter news on that front, coupled with conservative starting valuations for equities, leaves room for a “risk on” rally in the coming summer and autumn.”
By mid-2013, he expects people to shift portfolios into cyclical equities and industrial commodities to take advantage of a likely turn in sentiment.
He also says interest rates will hold steady in Canada through 2013, but that Governor Mark Carney’s successor will nudge rates up 50-75 basis points in 2014.
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