Rising equity prices are signaling better times ahead for investors but firmer global growth will depend on central banks keeping interest rates steady in 2014, notes a new report from CIBC World Markets.
“Global growth should finally surprise on the high side in 2014,” says Avery Shenfeld, chief economist at CIBC. “A year of 4% global growth is hardly spectacular, but will be a point faster than 2013, and a half-point above the last IMF forecast.”
One of the key conditions for growth is supportive monetary policy, Shenfeld adds. “Central bankers in North America, Europe and Japan, each in their own way, are going to ask markets to give low rates a chance.”
CIBC outlines its complete 2014 forecast in Outlook 2014: Give low rates a chance.
Canada: Better in 2014
Canada will need help from a global recovery to push its economy forward in 2014, say deputy chief economist Benjamin Tal and senior economist Emanuella Enenajor. “Business spending and exports should accelerate, but with consumer spending, homebuilding and government outlays all set to underwhelm, growth of 2.3% in 2014 will trail the U.S. pace.”
Fortunately for investors, stronger global growth will help the Canadian equity market. “Our top-down model points to a 12% gain in corporate earnings for 2014,” says Mr. Shenfeld. “Within the equity market, what hasn’t played well in the past few years should now outperform.” That includes equities tied to global growth such as base metals and energy stocks.
CIBC’s 2014 forecast for the Canadian dollar sees it bottoming at 91 cents U.S. in the first quarter but strengthening to just five cents weaker than the U.S. dollar by year-end as global growth helps improve the country’s trade balance. Early-year weakness for the loonie will be due in part to the latest policy statement from the Bank of Canada which encourages speculation of a rate cut. Mr. Shenfeld calls this a “phantom rate cut, one spoken about but never seen,” which can boost economic output through the exchange rate while keeping household borrowing in check.
He expects the Bank of Canada will hold off hiking interest rates until early 2015. “Higher-than-historical levels of household debt imply a much slower trajectory back to ‘normalcy’ for interest rates, as even small doses of higher rates will impose a significant squeeze on spending room. Don’t be surprised if after taking rates to merely 1.75% in 2015, we then see a pause at that level to allow the central bank time to gauge the economic response.”
U.S.: Revving up for 2014
In the U.S., a real recovery take shape in 2014-2015, say senior economist Peter Buchanan and economist Andrew Grantham. Substantially lighter government belt-tightening combined with a “housing recovery in progress and the shale revolution boosting U.S. energy and related manufacturing,” should see the economy achieve 3% growth in each of the next two years.
The economists note housing starts, home sales and prices remain on broadly upward trends as young people enter the market.
Meanwhile, tame inflation should see the U.S. Federal Reserve keeping rates near zero until 2015, the report notes.
Read: No surprises in 2014
Global Recovery: Picking up the pace
After a challenging few years, the global economy is finally showing signs of moving out of the slow lane, the economists note. The predict growth rates of 4% in 2014 and 4.2% the year after.
The rising tide of growth should go a long way to restoring export momentum in emerging markets, they say. China and India are already showing improvement and should continue to contribute disproportionately to global growth and resource demand,” says the CIBC report. The economists are forecasting growth of 8% and 5.3% for China and India, respectively in 2014.
Meanwhile, in the Eurozone, fiscal policy will spur faster-paced growth the economists note. “With countries missing deficit targets no longer being forced to make up the shortfall immediately, fiscal drag will likely be much lower,” they note in the report. CIBC is forecasting 1.4% growth in the Eurozone growth in 2014.
Read: Trends to watch in 2014