Notes from the Economic Outlook 2013

Article written by Jennifer Black and Dedicated Financial Solutions.

Notes from the Economic Outlook 2013

We were privileged to be guests at the Economic Outlook 2013 sponsored by the Economic Club of Canada on January 11, 2013. Each year the top economists in Canada provide their predictions for the year for a number of different areas; Canada, U.S., Europe, Financial Markets, Emerging Markets, etc.

Each of the big 5 banks send their Chief Economist. This year they were joined by a 6th Economist from BNP Paribas.

Here is a list of the Economists present this year.

  • Craig Alexander, Chief Economist, TD Bank Financial Group
  • Warren Jestin, Chief Economist, Scotiabank
  • Avery Shenfeld, Chief Economist, CIBC World Markets
  • Craig Wright, Chief Economist, RBC Financial Group
  • Doug Porter, Chief Economist, BMO Capital Markets
  • Julia Coronado, Chief Economist, BNP Paribas

Warren Jestin of Scotia Bank started it off by discussing his views on Emerging Markets. Warren feels that the Emerging Markets paradigm has changed significantly compared to a decade ago. Where they used to be the low cost suppliers of goods that we consumed in the western world, they are now the market. Taking a look at China, as an example, they have accounted for approximately 60% of new car sales (additional sales) since the start of the millennium. China is nearly a quarter of global production and if all projected assembly plants are built over the next 3 years they will double capacity from that. This is a huge increase over a short period of time. Chinese tourists are now number one in the world in terms of global spending. Having $3.2 trillion in foreign exchange reserves, they are a major driver in the financial markets.
He feels the political risks are much more in the forefront. With pipeline development, pipeline sanctioning, whether it’s in the US or in Canada, is going to be a driving force. Technology change will become extremely important. He sees increasing dominance in the Emerging Markets space. He is predicting 0% growth in Europe. Some countries are performing better, like Germany and the UK,  but many of the debt heavy economies will struggle to get out of the recession.
His prediction for the US is about 2% growth with Canada coming in a little shy of that. Stronger still with 2.5%-3% are Australia and Korea. Here is where we leave the developed world and enter the realm of the emerging markets. He sees countries with 3.5%-4% growth being Brazil, Mexico, Ireland, Russia, with 5%-6% growth from Peru, Chili, Columbia, and India, and China, still having a bad year with 8% growth, because in the past quarter century they have had an average of 10% growth.
An important point is that as Emerging Markets continue to outperform developed markets in good years and in bad years, they are a driving force in driving the global economy and financial markets.

Doug Porter of BMO gave his comments on the USA. At the risk of repeating what he said last year he believes that the US has the greatest chance of surprising to the high side in the global economy. Looking beyond the issues around the fiscal cliff, he believes that it really over shadowed an improving US economy. However they are still unresolved issues on spending cuts and the debt ceiling limit. The remaining issues are more of a risk to the US credit rating and not an acute risk to the economy. They are bullish on the US economy for 2013 and 2014 believing it will grow by about 2.5% which remains .5% above what they see for Canada. The tables have turned where Canada used to consistently outperform the US, they believe we will see the US outperforming Canada consistently for a number of years. The reason they feel this way is because there is a lot of headroom for the US markets to recover, with a lot more pent up demand in the US than in Canada. Leading the way will be the housing sector. They feel this will be a large contributor to growth through 2013 and 2014. They see the residential construction sector growing by 15% this year. That would be the strongest annual increase in housing in the US for the past 30 years. While the job loss was significant since the recession started, about 4 million jobs were lost, over half of those lost were in construction alone. So a turn around in the housing sector can contribute very meaningfully to the employment numbers in the US and the US economy in the next year. Other areas see companies with strong balance sheets and in excellent shape. The US is also benefiting from the resurgence in oil and gas production and the fact that they have exceptionally low gas prices in comparison to other parts of the world. There are some downsides, with real fiscal restraint as part of the New Year’s deal, tax increases worth about 1.5% of GDP this year and credit spans are tightening in the US. He expects 2.5% growth this year and thinks it sets up a much better year for 2014.

Craig Wright of RBC gave his predictions on Canada for 2013. Last year the biggest risks were largely on the external side. Things like China and if it would have a hard or soft landing, (of course seems to have had a soft landing with the weakest point being the 1st quarter) and the Eurozone and whether it would manage to contain the crisis (which from their perspective has managed to contain it) and then finally the US and the fiscal cliff which really still has the jury debating as to whether or not we have avoided it. Risks that are still out there are things like the Italian election, Spain and whether or not it will ask for help from the ECB. So the risks are there but the big tail risks are a lot less likely than what some had thought before. They see global growth of about 3.5%-4% which is right in line with the 20 year average. For Canada, not a bad export environment, he sees export prospects improving and continuing to pick up. As Doug mentioned the US growth is continuing and on a good note for Canada, it’s the sectors that Canada exports to where there is expected US growth.  Employment numbers have been impressive over the past few months and they believe it will continue that way throughout 2013. They see a cooling in the housing market. With that they expect that household debt will stabilize in coming years. Corporations in Canada are still sitting on large amounts of cash. Pessimism was reinforcing on the way down and optimism is reinforcing on the way up. Government spending in the Canadian economy continues to see program spending increasing but at a slower pace. We will continue to have a strong Canadian dollar in a modest rate environment.

Julia Coronado of BNP Paribas joined the panel this year and commented on the outlook in Europe. Italy with its bond yields are now part of core Europe again. As the year moved on and world markets were improving, the economy of Europe was actually descending into a recession where it is today. When people have been deciding where to put money it’s been all about politics, it’s been all about tail risks. This has been good news. Her colleagues remind her all the time to never underestimate the resolve of Europeans to do what is necessary when the time comes. When they are pushed to the wall, they will do what is necessary. And that’s what they’ve seen from the ECB. In 2011 they introduced the LTRO, the liquidity programs, which effectively took the possibility of a 2008 style financial crisis off the table. With the announcement they made with the new facility, the OMT, they took a sovereign funding collapse off the table. If countries run into funding problems there is now this mechanism for them to obtain support from core countries. These have all had a great effect on the markets. Equity markets have rebounded. If you look at GDP the European countries, particularly the peripheral countries, are in recession because of the fiscal tightening. Expect the recession to continue in 2013. It’s not going to be an easy turnaround and we’ll see news on the economic front that is very tough in the first half of the year. In the second half of the year things will improve, but slowly. She is cautiously optimistic. In the near future they believe there will be a good outcome in the Italian elections. The Spanish budget announcement is something to watch. If they come out with over 8% of GDP then that is the threshold for a downgrade of Spain. That is something to keep an eye on because it could set off a ripple effect in the bond market. But she remains cautiously optimistic.

Avery Shenfeld of CIBC commented on the outlook for financial markets. Financial markets do look ahead, which means that the outlook for 2014 could have an impact on markets at the end of 2013. Looking back to 1999 we had come off a dip in 1998. 1999 had a strong start but an even stronger second half of the year. He believes that’s what is in store for us this year. Looking both at the US and Canada. in the beginning there could be some disappointment. He expects a fairly strong second half and a shift from where things like REITs to more growth based equities, all based on the positive outlook for 2014. For the front end of the yield curve in Canada, the Bank of Canada needs to see some change in the external side of things. Exports and capital spending need to be doing well enough so that they can afford to increase rates. His feeling is that rates in Canada may wait until 2014 to start to rise. he expects further upward pressure on the yield curve in both Canada and the US, expecting rates for 10 year yields to be about 2.5% in both countries at the end of the year. With regards to Gold, as we get later in the year, he expects a softening in the price of gold. Right now they are neutral. They would be sellers on rallies rather than buying into those rallies.

Craig Alexander of TD Bank was asked to wrap it all up. With the spectrum of views expressed today, you get anything from cautiously optimistic to relatively optimistic, which suggests a year of transition for 2013. In 2011 and 2012 we saw a steady deceleration of global economic growth. 2013 is the year where the pendulum is likely to swing back to a stronger global economy, but gradually over the course of the year. Emerging markets will be the lion’s share of global economic growth. Economic conditions are likely to improve. Europe will not deliver significant growth but the trend will start to be our friend. Japan will continue to have less impact on the global economy than it has had in previous years. He believes the best economy growth will come in North America. The biggest headwind for the US will be re-balancing of fiscal policy, which is likely to slow down the growth and recovery. Drag in 2014 is likely to be less and the US economy will get stronger. In Canada the core challenges are the primary drivers of growth have been consumer spending, real estate, and government. They cannot drive the lion’s share going forward. We need to see a shift to the exports and business investment going forward. Canadian growth is likely to improve over the year. The world needs to go through re-balancing of fiscal policy. It is taking place in Europe and needs to take place in the US. The Canadian task is much more manageable. It is going to have a very significant impact on economic growth as fiscal policy becomes more of a drag. The key message to take away is that things are likely to improve other 2013 and stronger into 2014. Rates are likely to remain low even if they come up a little in the short term.

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