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Avery Shenfeld, chief economist at CIBC.

It’s been an interesting period with the U.S. cutting interest rates while the Bank of Canada stayed on hold. Of course, part of this is simply that the Federal Reserve had actually hiked interest rates further than the Bank of Canada. U.S. overnight rates went close to 2.5%. The Bank of Canada rightly saw this slowdown coming and stopped raising rates at 1.75%. We’ve now reached the point where U.S. overnight rates, though, are slightly below those in Canada, and our view is that, by some time in the first quarter, the Bank of Canada will end up nudging Canadian rates lower — partly to keep the currency from appreciating because we don’t want to put a handcuff on Canada’s exports, partly to reflect what we expect to see, which are some disappointments in the economic numbers as the next few months roll out. And partly just as an insurance move to make sure that this soft patch for the global economy doesn’t hit Canada too hard.

When we look at forecasts for both the U.S. and Canada, we have to start by remembering that both countries are pretty close to full employment. That’s certainly true for the U.S. In Canada, perhaps with the exception of Alberta and some of the Prairie provinces — we’re not quite there, but still quite close — and that puts a ceiling on economic growth. So for the U.S., it’s going to be hard for the U.S. economy to grow by more than a 2% rate over the next couple of years given the tightness in labour markets. We do think that 2020 will come in a bit below that, closer to 1.7%, and look forward to a better global economy, nudging that rate up to around 2% in 2021. So it’s going to be mediocre but still good enough to keep the U.S. near full employment.

In Canada’s case, we’ve slowed economic growth to around 1.5% in the past year, and I think that’s a fair bet for the forecast for the coming year as well. So that’s a bit below where we would need to sustain current levels of unemployment. We might see a bit of an upward drift there, so a bit disappointing for Canada. That reflects really the fact that Canada is more dependent on global trade than the U.S., and we are feeling the impact of a likely recession in parts of Europe as well as the slowdown in China. But here in Canada as well, we’re hoping that 2020 brings some healing to the global economy, catching up to the benefits of lower interest rates around the world and perhaps we hope some settling of the trade frictions that have slowed growth in 2019. So we do expect Canadian growth to be a bit brighter come 2021. But this is going to be still, by historic standards, a fairly moderate pace of growth for the Canadian economy given that provinces like Ontario and Quebec are pretty close to where full employment sits.

When economists look ahead, there’s always the risk of a bump in the road that sends our economy into recession. Typically about one year in 10 is a recession year, so we certainly can’t rule it out. Particularly with the global economy looking sluggish and some of our overseas trading partners on the verge of recessions, there is certainly a risk that a slowdown that we’re seeing now turns into recession. But I would say that it’s still our base case that a recession can and will be avoided. Europe had a recession in 2012, for example, and there was no recession in North America as a consequence of that.

The Bank of Canada still has some tools at its disposal to lower interest rates, if need be, to prevent a recession. And finally, we do have a bit of fiscal stimulus coming at the federal level in Canada, and if the economy started to look weaker, that could be ramped up to provide some additional spending power in the economy. So, all told, while we wouldn’t dispel the risk of recession, and certainly it’s probably a bit higher than in the average year, it might be 25% or so for the coming year, odds are that the right policy moves, not only here in Canada, but in the U.S., and the avoidance of a heated trade war, which has caused these recession risks to rise, those are the building blocks for avoiding recession. The biggest risks are if the trade war breaks out more heatedly between the U.S. and China or between the U.S. and Europe that we put another dent into the global scene, that will be tough for Canada to avoid. But at this point, the most likely scenario is that we skate through this soft patch.

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