Are central banks too optimistic about growth?

June 22, 2017 | Last updated on June 22, 2017
4 min read

In its April 2017 monetary policy report, the Bank of Canada forecasted 3.3% global growth for the year.

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But not everyone’s buying that. Speaking ahead of the BoC’s hawkish comments to CBC on June 13, John Braive, vice-chairman of global fixed income at CIBC Asset Management, said, “A lot of [analysts are] saying that [global] growth is going to be picking up. That’s a little too optimistic.”

Read: BoC talk turns hawkish, loonie rises

In the second half of 2017, Braive, who manages the Renaissance Canadian Bond Fund, expects economies to struggle against the headwind of slower growth in the U.S. as well as China.

Growing gains versus growing pains

“For the U.S., consensus is around 2.3% growth over the next year,” he says. “We would be about 40 basis points less than that.” That’s because he expects less contribution from exports, housing and non-residential structures. Though non-residential structures performed strongly in the first quarter, the data don’t “jive with the construction numbers we’ve seen,” says Braive.

And, though the Canadian economy has been on a recent tear, Braive’s GDP forecast going forward is low. “We’ve had some pretty good numbers [for GDP], but it’s mostly hung on the consumer and a bit of a turn in the investment side,” he says.

He adds, “Because of the very high level of debt and the risks that are growing in the housing market for a correction, we should see a pullback in overall consumption in Canada.” Indeed, in the BoC’s June 2017 financial system review, both mortgage lending and household debt are listed as lingering concerns.

Read: BoC review highlights hot housing, cyber attacks, liquidity

Private investment growth is forecasted at about 2%, but Braive’s forecast is lower because of falling oil prices. “There was some investment […] in the oil patch because oil had moved up to $50-plus a barrel,” he explains. “That’s now come down.” (This week, oil prices hit a low for the year, weighing on U.S. and Canadian markets).

Read: Oil price slumped to lowest level of the year

He suggests investment in Canada will be further affected by slower growth in the U.S. and China. Add in fewer exports and no expected change in public investment, and “we are below consensus on GDP for Canada,” says Braive.

Inflationary rumours?

As with growth, consensus is for higher inflation in the U.S. This is driven primarily by rising wages.

“As the employment rate has been coming down, everyone’s been waiting to see an increase in the wage side,” says Braive. But, “it hasn’t happened.”

One reason wages remain low is many workers aren’t participating in the labour force, so they don’t show up in data. “If you look at the key 25- to 54-year-old age bracket, there are 23 million [Americans] not in the labour force,” says Braive, despite this demographic being in its prime earning years and benefiting from an economic expansion since 2009.

Read: Is Canada’s economy set to surge? Here are banks’ forecasts

Potential reasons for the lack of labour force participation include a mismatch in skills between workers and jobs, an expansion of U.S. social programs, and social problems, like addiction.

Further, globalization, which has eliminated many jobs, also helps keep wages low. Meanwhile, prices are being kept low, in part due to technology.

“The Amazons of the world put pricing pressure on the stores that are in malls, for instance,” says Braive. “Retail sales for that type of bricks-and-mortar store [are] fairly weak and under pressure.”

Demographic trends also keep the lid on prices because they can affect spending patterns. “As you get older,” says Braive, “you become frugal” and price shop.

For the next year, consensus for U.S. inflation is about 2.4%, while Braive’s view is about 1.9%. “If you look at it on core, we’re at [1.6%] and consensus is around 2[%],” he says. As such, he expects the Fed to “take a pause” after its most recent rate hike, last week.

Read: Fed hike reflects comfort with U.S. economy

In Canada, inflation forecasts are around the same level.

In its April 2017 report, the Bank of Canada forecasts inflation will “remain concentrated in the lower half of the Bank’s inflation-control range, although they have edged up marginally.” And, in a June 12 economic update speech, senior deputy governor Carolyn Wilkins noted “slack in the economy is still translating into inflation that is below [the BoC’s] target,” which is 2%.

Says Braive: “We don’t see that changing much going forward.”

He concludes, “All that means is there is no inflationary pressure. This means central banks can wait longer before they raise interest rates. But, the U.S. is raising its [target range] anyways and the Bank of Canada may take the opportunity to reverse the half-percent cut [from] 2015—now that the Canadian economy has largely recovered from the hit to oil prices and the Fort McMurray fires.”

Indeed, he’s not alone is calling for an earlier BoC move. Based on the central bank’s recent hints at a possible hike, Scotiabank, National Bank and CIBC Economics have all forecast a rise in October. This would be the central bank’s first hike in nearly seven years.

Read: Despite dovish data, BoC could move in 2017