Long "to do" list facing global policy makers to repair engines of
TORONTO, June 20, 2012 /CNW/ - Troubled global economies and tapped out
domestic consumers will see the Canadian economy grow at 2.1 per cent
this year and next, finds the latest economic forecast from CIBC World
"The global economy hasn't fallen off a 2008-style cliff, but it's been
too close to the precipice for investor comfort," says Avery Shenfeld,
Chief Economist at CIBC. "There's a long "to do" list for policy makers
that will have to be completed to repair the engines of growth. Some
emerging markets are on the boundary of a hard landing, Europe is mired
in recession, and the U.S. is moseying along on its half-speed
The "To Do" List for 2012-13
Portugal 2, Ireland 2
Greece 3 or managed exit
Other European bank equity infusions
Increased European Stability Mechanism
ECB bond purchases or QE
Chinese monetary and fiscal stimulus
U.S. softening of fiscal cliff
Mr. Shenfeld says progress against the list has resulted in CIBC
slightly raising its already below-consensus call for 2012 world growth
to 3.0 per cent, its slowest pace since the recession.
A continued slowing of global economic growth will cause challenges for
Canadian exports. "While a host of indicators continue to signal
impressive economic momentum in resource-rich provinces like Alberta
and Saskatchewan, we expect a less voracious appetite for commodities
in key emerging markets," says Benjamin Tal, Deputy Chief Economist at
CIBC. "The associated pullback in commodity prices could, at the margin
at least, mean less aggressive investment, job creation and ultimately
GDP growth for Canada's most resource-leveraged regions."
The report notes that while in recent quarters, rising U.S. auto sales,
energy price relief and a cheaper loonie have contributed to economic
resilience in Ontario, the potential for a withdrawal of U.S. fiscal
stimulus in 2013 could slow that growth, and further add to a
deceleration in emerging market demand.
CIBC used the Bank of Canada's foreign activity index (which combines
information on U.S. consumption, investment and GDP growth in 34 other
countries) to help predict growth in Canadian exports. Based on CIBC's
U.S. and global economic forecasts it expects growth in the BoC foreign
activity index will soften as we head into 2013, leading to a slower
trajectory for Canadian exports.
"That could dent job creation in Canada, as hiring has quickened
recently on the bet that external demand will improve," says Mr. Tal.
"Almost all of the job creation seen in the last six months came from
the tradeable sector, namely manufacturing and natural resources that
depend heavily on foreign demand." He adds that while a rebound in U.S.
industrial production and vehicle demand has provided ample
justification for the increase in factory hiring, a continued slowdown
in emerging markets and risks of a sharp contraction in U.S. government
spending could bring a halt to job growth.
At the same time as Canadian exports are facing new headwinds, Mr. Tal
notes that consumer demand in Canada is starting to wane. "Low interest
rates for the past few years have kept the economy alive while the
world around it crumbled, and while that bought the Canadian economy
time, flash forward a few years and the domestic economy has yet to
find sources of growth that can survive if policy makers pull the plug
on the low-rate IV-drip.
"Years of free-flowing credit in Canada have seen Canadians overshoot by
a wide margin what could be considered "normal" consumption relative to
population trends. So after gorging at the table of plenty for several
years, Canadian consumer appetites may already be satiated."
As a result, low interest rates now have a diminishing positive impact
on the Canadian economy in general, and households in particular. The
effective interest rate on household debt has been hovering at a record
low for over two years, and has been on a clear downward trend for more
than four years. As is frequently the case, the more a tool is used the
less effective it is. In the first half of the last decade a 100-basis
points decline in the effective rate translated into a 2.1 per cent
acceleration in the growth of household credit. The same reduction has
more recently seen a deceleration of 4.1 per cent.
"The cooling trend in Canada's domestically-generated demand means that
beyond the risk to exports from a U.S. slowdown and the
on-again-off-again Eurozone crisis, the Bank of Canada has reasons to
stand pat on rates," adds Mr. Tal. "Economic growth in both 2012 and
2013 should fall short of the Bank of Canada's expectations and it may
have to wait for a U.S.-growth-induced pick-up in 2014 before it feels
compelled to move from the sidelines."
CIBC Global Real GDP Growth Rate Forecasts
CIBC has marginally lowered its forecast to 7.8 per cent this year but
notes that government policy should accelerate growth to 8.5 per cent
in 2013. It notes that after excessively tightening to contain a
housing bubble and inflation, Beijing is now reversing course, with
below-target inflation giving policy markets a green light.
Stubborn inflation may hold back India's central bank and, as a result,
CIBC has slashed its growth forecast for the formerly shining economy
to 5.5 per cent.
The blueprint for a rebuild of Europe's economic motors isn't hard to
outline: a kinder, gentler path of fiscal restraint in the periphery,
with much more support for those countries refinancing needs from
stability funds and central bank purchases, preferably unsterilized.
Each time they've approached a crisis point, Europe has come up with an
11th hour deal. Thus, best bets are that they will be dragged kicking
and screaming into some of the remaining "to do list" measures, enough
to generate modest but still sub-one per cent growth in 2013.
Political pressure for government restraint will drag on a U.S. economy
that's otherwise nicely coming together, with growth running just under
two per cent.
The complete CIBC World Markets report is available at:
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SOURCE CIBC World Markets
For further information:
Benjamin Tal, Deputy Chief Economist at 416-956-3698, firstname.lastname@example.org or Kevin Dove, Head of External Communications at 416-980-8835, email@example.com.