Spring 2012
Financial crisis avoided, for now
Europe is currently in a mild recession that is likely to persist for the next year but it has so far avoided a full-blown financial crisis. Thanks to the European Central Bank’s injection of liquidity and the Greek bond swap, Europe’s debt problems have been contained for the time being. However, the region faces austerity and economic weakness as governments deal with debt problems.
Consumers gaining confidence in U.S.
In the United States, positive news comes in the form of continuing payroll job growth, edging the unemployment rate lower. As a result, consumers are gaining confidence and are increasingly willing to make discretionary durable goods purchases. The U.S. economy is forecast to continue growing in 2012 and 2013 but at a rate of only 2.5%. Fiscal drag will keep economic growth relatively low in the U.S. compared with previous recoveries. The stimulus from the 2009 Recovery Act will be wearing off and spending cuts in the U.S. will surface in 2013 from the debt ceiling agreement. However, the U.S. Federal Reserve has restated its intention to keep interest rates down, at least until 2014.
Canada’s leading indicators point to continuing growth
Retails sales in Canada showed solid gains in early 2012 and housing starts have exceeded expectations. Despite a recent pause in total employment growth, employment in Canada is now at a level well above the previous pre-recession peak, gaining 82,000 new jobs in March, most of which are full-time positions. According to the Bank of Canada’s Business Outlook Survey, business confidence is up with more companies expecting sales growth to be higher over the next 12 months. Credit conditions have eased and capital spending and hiring plans are much more positive. In the Mining and Oil & Gas sectors, capital spending intentions point to a 17% spending increase in 2012 over last year’s outlays. Exports have also picked up and housing demand is expected to remain high as the current level of interest rates continue to make mortgage servicing affordable.
Still, economic performance to remain sub-par
Weak recoveries are the norm in the years following a systemic financial crisis and we can expect sub-par economic growth in Canada and the United States for several years. The debt cycle’s strain on Canada’s government finances has now led to serious belt-tightening at the federal level and in Ontario. In addition, Canada’s growth will be constrained by an uncompetitive currency and a slowing world economy. As a result, the Bank of Canada is likely to leave interest rates where they are. The Canadian dollar strengthened in February and March. However, commodity markets will remain challenged as the global economy exits from the banking and debt crises and this could result in restrained prices for commodities. The Canadian dollar, which is viewed as a commodity currency, could also be adversely affected.
This article was submitted by T.E. Investment Counsel Inc.
At a glance
Economic growth
Real GDP growth in Canada is expected to fluctuate around a 2% annual growth rate.
Inflation
As a result of Canada’s slow-paced recovery, there is still ample capacity for expansion leaving the inflation risk low.
Interest rates
The Bank of Canada is unlikely to raise interest rates and add to proposed federal and provincial government fiscal restraint.
Canadian dollar
The Canadian dollar fluctuated around parity with the U.S. dollar, averaging 99.90 cents U.S. in the first quarter.
Employment
Employment increased by 82,000 in March, reversing the previous sideways trend.
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