U.S. growth to outpace with rate hike in September, Bank of Canada to
TORONTO, June 3, 2015 /CNW/ - CIBC World Markets has cut its 2015
Canadian growth forecast to a paltry 1.4 per cent as weak commodity
prices and slowing emerging market economies have not provided the
expected lift to a sluggish domestic economy.
"We're slashing our 2015 growth forecast for Canada by more than a
quarter point to only 1.4 per cent, stung by a downside miss in Q1, and
an end-of-quarter picture that depressed the Q2 outlook," says Avery
Shenfeld, Chief Economist with CIBC.
Mr. Shenfeld notes that while he expects commodity prices to rebound
somewhat this year, slowing global growth will keep them well below
previous peaks. The new CIBC forecast has dropped global growth by
nearly a half point to 2.9 per cent, the softest since the recession.
"That owes to a divergence between an improving developed world and a
deterioration in emerging markets.
"U.S. fundamentals still look healthy despite the poor Q1 outturn.
Unless America's business leaders are totally out of touch, their brisk
hiring points to solid demand growth ahead. Political risks in Greece -
and Spain later this year - won't be enough to take the Eurozone off a
clear recovery path, with lots of headroom for non-inflationary growth.
But a downshifting in China and recessions in Russia and Brazil are
contributing to a much less impressive overall pace."
While he expects current stimulus efforts to boost growth in emerging
market economies next year, secular forces, including slower trend
growth in an aging west, will limit the bounce to 3.6 per cent in 2016,
well below the nearly 5 per cent global growth pace seen in the five
years leading up to the last recession.
With a less-globally-exposed economy, he forecasts that the U.S.
economy, with much more pent-up demand in its less-indebted household
sector, will grow faster than Canada this year. "Since Canada outpaced
the U.S. during the recession and early recovery, divergence in growth
has already generated a convergence in economic slack, necessitating a
parallel convergence in short term rates. The Fed will carry through on
Yellen's clear intention to hike rates this year. But a soft Q1, and
tame core personal consumption expenditures, will see the Fed wait
until September to pull the trigger, needing more assurance that growth
"Slower trend growth and reduced incentives for capital spending at any
given interest rate will see central banks and bond markets settle at
what, by historical standards, will still be unusually low yields.
That's just the next chapter in a story dating back to the 1980s, in
which successive cycles have required lower average real interest rates
to reach and stay at full employment."
Mr. Shenfeld does not see much movement for the Canadian dollar, calling
for it to drop a few cents after the first Fed hike, then recovering
modestly. He also expects the Bank of Canada to stand firm on interest
rates. "Governor Poloz's optimistic forecast for the next six quarters
repeatedly cites the underpinning of a softer exchange rate. While
another ease is very much on the table, if the Fed actually hikes by
September, the Bank of Canada will be relieved of the burden to cut
again as the loonie weakens. Keeping the Canadian dollar range bound as
oil recovers will see the Bank of Canada stay on hold right through the
first half of 2016."
The report calls for equities to outperform bonds next year, but be
somewhat volatile in the next couple of quarters. "Our top-down leading
indicator model, which translates trends in Canadian and U.S. GDP
growth, oil prices and other key variables into forward earnings,
projects a modest 6 per cent growth rate for year-on-year earnings in
the coming four quarters, well below the double-digit consensus," says
"That would put the Composite index at a lofty 20 times forward
multiple, if you substitute our model's earnings projection for the
bottom up consensus. While that's heavily tilted towards huge multiples
on energy stocks, the market's path could still see-saw as earnings
downgrades for 2015 trade off against economic hopes for the following
"Our macro model looks for a heady 18 per cent bounce in calendar 2016
earnings, lifted by improved global growth, firmer prices for oil and
lumber, and improved Canadian economic performance. The denominator for
discounting future earnings and dividends will be a bit higher, which
will eat into the multiple. But as we've seen in the past, that can be
more than offset by a bright picture for earnings and dividends growth
during a gentle and early stage of a tightening cycle."
The complete CIBC World Markets report is available at: http://research.cibcwm/economic_public/download/fjun15.pdf
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For further information:
Avery Shenfeld, Chief Economist, CIBC World Markets Inc. at (416) 594-7356, email@example.com or Kevin Dove, Head of External Relations at (416) 980-8835, firstname.lastname@example.org