Two of Canada’s top economists weigh in on what the coming year may bring

The Canadian economy topped headlines over the past year, from soaring joblessness to bank bailouts and emergency interest rate chops. Predicting future directions the economy will take is easy. Getting it right, though? Not so much. Here, we speak with two of Canada’s top economists – the optimist and the pessimist – on what the coming year may bring.

Bull versus bear

 

THE OPTIMIST: Stéfane Marion, chief economist, National Bank Financial.

1. You see the economy growing about 2.9 per cent in 2010. What will be the main factors generating this growth – and what are the chief risks?

The sources of growth will remain mostly domestic: final domestic demand at 3.2 per cent versus minus 1.4 per cent in 2009. Consumer spending and business investment in machinery and equipment expected to be main contributor to growth. The main risks to the Canadian economy remain external: the performance of the U.S. jobs market in particular.

2. Trade plunged this year as global demand fell off a cliff. What’s in store for Canadian trade next year?

Canada should benefit from a recovering global economy which we see growing 4 per cent in 2010. We see exports growing for the first time in two years, rebounding more than 6 per cent after two years of contraction.

3. Our jobless rate hit an 11-year high this year. How will the labour market fare in 2010?

We see the unemployment rate falling to 8 per cent by the end of next year. The reason we do not see the jobless rate well below that is because we see a de-leveraging of U.S. households as a factor to be reckoned with. A return of consumer thrift south of the border will be one of the main medium-term consequences of the credit crisis. This is particularly important for Ontario, which must adapt structurally to this reality.

As a result, Ontario’s jobless rate is likely to come down at a slower pace than during previous recoveries, impacting the national average.

4. The Bank of Canada still plans to keep interest rates on hold until the middle of next year, provided its inflation outlook doesn’t change. When do you think the central bank will move, and where will its key lending rate be by the end of next year?

Unlike the situation in many of our trading partners, the Canadian banking sector is not dysfunctional. In our opinion, the zero-interest rate policy (ZIRP) is becoming too potent a medicine for an economy characterized by healthy chartered banks that allow the full transmission of monetary policy to the real economy. It will take higher interest rates to ensure that credit growth does not run ahead of fundamentals. Since we see the U.S. economy growing almost twice as fast as the Bank ofCanada’s forecast in 2010, we also expect the BoC to move a little faster – in April, 2010. We have the bank rate at 1.5 per cent at year-end.

5. Inflation was largely a non-story this year. Any inflationary threats on the horizon, and if so, when and where?

Despite the deterioration in labour conditions earlier in the year, unit labour costs in Canada are still up 2.5 per cent on a year-over-year basis versus minus 1.4 per cent in the U.S. While inflation is not an imminent threat in Canada, it might turn out to be more resilient than what the BoC expected, particularly now that the Canadian jobs market is starting to improve.

At the global level, we see inflation being more of a threat in emerging Asia where many of the currencies are pegged to the U.S. dollar. For these countries, the current stance of monetary policy is over-stimulative.

6. Bank of Canada Governor Mark Carney is counting on consumers to lift the economy out of recession. What’s in store for Canadian consumer spending in the coming year?

Consumers should continue to power the economy ahead in 2010 thanks to improving economy and jobs market.

7. The Canadian dollar was the subject of much chatter this year as it teetered toward parity. Where will the currency trade in the coming year?

We see the loonie trading at 92 cents (U.S.) at the end of 2010. In our opinion, there is too much pessimism on the greenback. There is still no “heir apparent” to the U.S. dollar as a reserve currency.

8. Commodity prices sunk, then came back this year. Gold prices have blasted into the stratosphere. How do you think oil, gold and metals will fare next year?

In a context where the global economy grows relatively strongly, commodities should remain at elevated levels. However, the whole spectre remains vulnerable to U.S. dollar appreciation. Bullion is the most vulnerable at this juncture.

9. What’s in store for the global economy, and where will the strongest and weakest pockets of growth occur?

Global real GDP of 4 per cent with the strongest pockets being emerging economies, Asia in particular. We see the Euro zone as underperforming.

10. Lastly – how are you spending the holiday season?

Part of our holidays will be spent spending a little more than last year to help satisfy our nephews’ pent-up demand. After all, this is not a depression!

 

THE PESSIMIST: Carlos Leitao, chief economist at Laurentian Bank Securities.

1. You see the economy growing about 2.1 per cent next year (as an average annual rate of growth). What will be the main factors generating this growth – and what are the chief risks?

Strong domestic demand. We might push up our forecast a little, but we’ll still be at the low end of consensus. We think the drag from the external side, net exports, will remain a big obstacle. We run the risk of overheating the domestic side of the economy, if we continue with the same trends. We’re not in bubble territory yet. But to prevent that, rates will have to rise.

2. Trade plunged this year as global demand fell off a cliff. What’s in store for Canadian trade next year?

Two areas of concern. One is the obvious – the United States. We still export 73 per cent of goods to the U.S. and I don’t think the U.S. in 2010 will be strong. There will be growth, but not the kind that’s typically friendly to a country like Canada – in their business investment and exports. That doesn’t do much for auto plants in Ontario or lumber mills in Quebec, that’s why I don’t think we’ll see a big kick.

The other one is globally, in my opinion there’s too much emphasis put on growth in Asia, particularly China. I’m not quite sure if the Chinese economy is that strong. Sure, the numbers look impressive but I don’t think they’re sustainable. We’re already seeing the beginnings of inflationary pressure, they’ve have had fast credit growth and I think they’ll start to cool it down.

3. Our jobless rate hit an 11-year high this year. How will the labour market fare in 2010?

It’s a little disconcerting to see such volatility in what used to be such a stable survey. I suspect we’ll see higher rates of unemployment, because economic growth is not so sufficient to bring those rates down. I see it going up and peaking at 8.9 per cent in the first quarter of 2010 and then coming down – but very, very slowly.

4. The Bank of Canada still plans to keep interest rates on hold until the middle of next year, provided its inflation outlook doesn’t change. When do you think the central bank will move, and where will its key lending rate be by the end of next year?

We see it making a move in July or early September. Some people say by that time the Fed will still be far from a rate hike, and that’s a risk (that could spark a rally in the Canadian dollar). But they’ll weigh that against risk of overheating the domestic economy. So in fairly short order, they’ll increase by 50 basis points per meeting so that by January or so of 2011, they’ll be at 2 per cent. Then they’ll assess and stay there a while. So we’re moving from extremely low to just low.

5. Inflation was a non-story this year. Any inflationary threats on the horizon, and if so, when and where?

None whatsoever. Zero. There really isn’t inflation. The BoC will move not so much because of inflation expectations but to prevent asset prices from bubbling.

6. Bank of Canada Governor Mark Carney is counting on consumers to lift the economy out of recession. What’s in store for Canadian consumer spending in the coming year?

It’s difficult to please an economist – we want them to shop and shop aggressively, but not too much so they get into debt. In the next six months, we think consumer spending will continue to rise. Consumer prices aren’t under any sort of pressure, so there’s low inflation and a strong currency, it’s the best of all possible worlds. As time goes by, I think it will become less favourable, there are some tax increases on the horizon … the fiscal picture will get tighter, monetary policy will tighten, and on the labour market front, a jobless rate at 8.7 or 8.9 per cent starts to bite. The picture is particularly less rosy in Ontario.

7. The Canadian dollar was the subject of much chatter this year, as it teetered towards parity. Where will the currency trade in the coming year?

The currency’s sharp movements now seem to have pulled back and will stabilize in 2010. Any additional appreciation, if there is one, will be minimal. I don’t think we’ll go to $1.10 again, but maybe close to parity or just above.

8. Commodity prices sunk, then came back this year. Gold prices have blasted into the stratosphere. How do you think oil, gold and metals will fare next year?

I don’t see such a big kick coming from the commodities front. I wouldn’t count on much higher natural gas levels: there’s lots of supply and demand hasn’t increased. Forest products are still falling.

Gold is quite the interesting thing. It’s in a world of its own. I’ve never been a big admirer of gold, so I missed this rally. There’s a great deal of speculative push behind gold prices, which I just think is contradictory. Gold is pricing in a more catastrophic scenario than is realistic.

9. What’s in store for the global economy, and where will the strongest and weakest pockets of growth occur?

I see the BIICs as strong – Brazil, India, Indonesia and China. Not Russia. China, though, won’t be as strong as people think – more like 8-per-cent growth than in excess of 10 per cent. Areas of weakness are in the other emerging markets, particularly those with high levels of debt. Eastern Europe, Ukraine, Turkey. Africa, still, unfortunately.

10. And how are you spending the holiday season?

I’m staying in the office and not going anywhere. Which is good because journalists tend to be out of the office, so less phone calls. I can clean my desk, which is covered in papers. In this paperless office, we end up printing a lot of material. It’s our way of supporting the pulp and paper industry. So I’ll try to deal with that.

 

Tavia Grant

From Monday’s Globe and MailPublished on Sunday, Dec. 27, 2009 7:44PM EST
http://www.theglobeandmail.com/report-on-business/bull-versus-bear/article1412833/

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