Growth will tail off in second half: CIBC

By Steven Lamb | January 14, 2010 | Last updated on January 14, 2010
3 min read

The North American economy may be advancing at present, but there is a real risk that policymakers will get the timing wrong, withdraw stimulus and choke off growth, according to economists at CIBC World Markets.

Government spending and record low interest rates may be all that’s keeping the economy growing at this point in the recovery, and removing these measures prematurely could result in the dreaded “double-dip” recession.

In light of this possibility, the bank is predicting strong growth early in the year, tapering off in the second half.

“We’ve lifted our first-half growth forecasts materially for both the U.S. and Canada to the 3.5% range,” says chief economist Avery Shenfeld in CIBC’s latest Economic Forecast report. “Heroic rescue efforts have clearly paid off. While those still in the ranks of the unemployed might not see it that way, record low interest rates and huge fiscal stimulus around the globe brought both economies and financial markets back from the brink.”

In the U.S., the private sector’s contribution to growth is largely in the form of inventory replacement, which should abate in the second half of the year. Consumers will remain focused on debt reduction and saving, with consumption trailing as a priority.

Meanwhile regulators are considering tighter capital requirements for the banking sector, which would result in tighter credit for both households and businesses.

“All of that could see U.S. GDP advance at 2.8% for the year as a whole, but buried within that will be a mere 1% second half pace, and the growing pressure for fiscal restraint has us cutting our 2011 forecast by a full percentage point to 2.4%,” Shenfeld says.

Tighter monetary policies in Europe and China show both are more concerned with stemming inflation than stimulating growth, which could have an impact in Canada.

“If the past two years taught us anything, it’s that our small open economy can’t chart its own course,” Shenfeld says. The manufacturing and resource sectors will come under pressure as foreign demand declines.

But of greater concern is that the Bank of Canada could raise interest rates too soon, driving up the value of the Canadian dollar and hurting the export sensitive sectors of the economy.

Historically, the Bank of Canada has raised rates ahead of the U.S. Federal Reserve. Shenfeld expects the Bank will make the same mistake this time around, raising rate by 75 bps in the third quarter.

In the U.S., the Fed will likely hold onto it’s near-zero rate policy for as long as possible, before raising rates in 2011. Fixed income markets will see flatter returns, as issuance of both sovereign and corporate debt soars.

“The stock market could get a decent year’s return in the first six months, when year-on-year earnings comparisons will be against the depths of the recession, macro growth rates will be fairly healthy, and resource prices could still be climbing,” Shenfeld adds. “While comparable fixed income yields won’t be as low as they are today, the gap between TSX dividend yields and those on bonds is very narrow, and expectations for dividend growth in 2010 and beyond should see yield-hungry investors supporting another leg higher for the TSX.”

American sentiment spikes While CIBC predicts the North American economy will struggle, current conditions are far better than in 2009.

South of the border, U.S. consumer confidence has bounced back, reaching its highest point since September 2008, according to the RBC CASH (Consumer Attitudes and Spending by Household) Index.

“The latest increase seems to be based on the recent string of positive economic news,” said RBC Capital Markets U.S. economist Tom Porcelli. “This bodes well for continued improvement in consumer confidence, which will be crucial to economic recovery.”

The index spiked in January, climbing 19.3 points from December to a reading of 58.3. One of the biggest drivers of that gain was consumers’ expectations on the employment front. The RBC Jobs Index gained 16.5 points to 67.9, as job losses slowed and workers felt more secure. Sixty two percent of respondents said someone in their immediate social circle had lost their job, compared to 71% in December.

Economic outlook improved, with the Expectations Index climbing 27.2 points to 67.6. The latest survey found 38% of consumers believe their local economy will be stronger six months from now, up from 35% in December. Only 15% believe it will continue to weaken, compared to 19% in December.

One quarter of consumers rated their personal financial situation as strong, up from 21% in December, while 32% characterized their situation as weak.


Steven Lamb