Canadian economic growth to accelerate

The Canadian economy, like its housing market, continues to surprise doubters, and is expected to grow between 2% and 2.3% this year, says Russell Investments in its second quarter economic update.

“While the Canadian economy is currently trending below our forecast level, growth should accelerate as the year progresses as a result of our lower Canadian dollar boosting exports and an improving U.S. economy,” says Shailesh Kshatriya, associate director, client investment strategies at Russell Investments Canada. “However, we remain concerned about employment trends.”

Kshatriya believes that declining job growth rates, coupled with high household debt, may adversely impact consumption and weigh on growth this year, despite the offset of the expected growth of exports and a lower Canadian dollar.

Read: BoC downgrades growth forecast, keeps key rate at 1%

Meanwhile, Kshatriya is watching business investment. “A lower Canadian dollar relative to the U.S. may be positive for exports, but it makes new purchases to improve efficiencies more costly if those purchases are to be sourced externally. Meaningful business investment has largely been absent over the last several years when our dollar was hovering at parity with the U.S. The question is: will business feel confident enough in domestic and global growth trends to spend now that our dollar has declined by roughly 10%?”

In terms of the direction of the loonie, Kshatriya believes the dollar’s descent has run its course, and predicts a band of roughly $0.89-$0.94 for the balance of this year.

Read: Ukraine crisis takes toll on Russian economy

The housing market has not experienced the meltdown some market observers have been expecting. Kshatriya believes there will be a period of stagnation rather than outright devastation—until the Bank of Canada increases rates, which isn’t expected for at least a year.

Globally, it’s been a lackluster start to 2014. Headwinds included the rough winter’s impact on North American economic data, concerns about China’s debt and Japan’s taxes, as well as the pair’s stand-off in the East China Sea. The Russia-Ukraine dispute has also been a factor. But, as U.S. jobs gains are expected to average 215,000 over the next nine months and the Fed’s interest rate hikes held off until mid-2015, Russell’s strategists maintain a modest preference for equities over fixed income globally.

Read: Home sales up 4.9%

“Investors should maintain equity market exposure. However, the temperature is rising. It could be a warm northern hemisphere summer, not just for vacationers, but for investors as well,” says Andrew Pease, Russell’s global head of investment strategy.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.