Worried about the market? Focus on federal budget

The global economy isn’t heading for a downfall, even though growth forecasts have been steadily downgraded over the last few years.

So says CIBC chief economist Avery Shenfeld, in a research note. He adds, “The wall of worry [about global growth] isn’t that high in consensus economic forecasts. [But], it’s been heard in the talk on the trading floors of Wall Street and Bay Street, […] among the newly cautious FOMC voters and in the resulting flight to safety rally in US Treasuries.”

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However, investors should know that “prospects aren’t as bleak as some now fear, and rates aren’t going negative everywhere.” For example, “We long ago projected that U.S. rates will track much lower than in past cycles.” And, America isn’t “sitting with a massive output gap like the one still festering in Europe.”

Read: How to communicate with clients during bad markets

While Shenfeld concedes Canada’s near-term growth prospects aren’t high, he says, “Just as fiscal policy differentiated the Eurozone’s post-recession fate from that of the US, [fiscal policy] will hold the cards for getting the Canadian economy back in gear. Monetary policy is a spent force here.”

So, while the road to recovery will be tough and prolonged, he predicts the federal budget may deliver more fiscal stimulus than promised as a remedy. Check out the full research note.

In a related research note, Shenfeld offers his thoughts on the upcoming budget: “When setting a federal budget against a backdrop of anemic growth, […] what’s typically seen as prudent is anything but.” Rather than remain defensive, he adds, the government needs to provide “adequate stimulus” to avoid putting the domestic economy at risk.

He notes, “Judging by the [Liberal] government’s recent communications, the federal budget won’t make that mistake.” In particular, he debunks the claim that the Liberals are spending outside of their means. “A balanced budget during the Liberal mandate is no longer in the cards. But that doesn’t mean Canada’s fiscal position, properly measured, is set to deteriorate over time. As growth rebounds, aided in part by government stimulus, the debt-to-GDP ratio is expected to fall in spite of the forecasted deficits.” Read more.

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