Canadian recovery to lead G7: CIBC

The Canadian economy will outperform the rest of the G7 next year, but there’s little cause for celebration, according to a report from the economics team at CIBC. Domestic strength will be counterbalanced by soft export markets, resulting in an anemic growth rate of just 2%.

Government stimulus will play a role in the recovery, the report says, but the true driver of Canadian outperformance will be consumer spending, as households were less severely hit by the recession in Canada, compared with the U.S. or U.K.

And while financial institutions around the world collapsed in the credit crisis, tight regulation of the Canadian banking and insurance sectors left the economy in a position of strength.

“Canadians can count their blessings,” says Avery Shenfeld, chief economist at CIBC, warning that weakness in our trade partners will hamper the recovery. “Through a half speed, 2% recovery in 2010, Canadian economy watchers will, like Toronto Maple Leafs fans, have to console themselves by saying, ‘Wait until next year.’”

Canada should see the real GDP growth rate almost double in 2011, to 3.8%, assuming that monetary and fiscal policy-makers hold their current courses.

“The Bank of Canada has pledged to stand pat on rates for several more quarters, even if its consensus-topping growth outlook is on the mark,” Shenfeld says. “Its U.K. counterpart surprised markets by adding to quantitative easing even amidst early signs of an economic warming. The Fed and the Obama administration both seem to recognize the fragility of the nascent expansion and are in no hurry to tighten.”

The federal stimulus package of $40 billion — or 2.5% of GDP — could account for just over half of the overall growth expected between the third quarter of 2009 and the end of 2010.

CIBC predicts growth of just 1.5% in the U.S. and only 1% in most of the eurozone economies.

“By [2011], U.S. consumers may have achieved the desired rise in the savings rate and will be willing to match income growth with spending,” Shenfeld says. “A year of modest job growth will add to that confidence. And Canadian capital spending will be turning in the lagged response to profit gains.”

With Canada’s primary trading partner struggling to recover, exports will be further throttled by a rising loonie and growing trade protectionism.

Politics will demand that American stimulus dollars are spent in the U.S., so Canada’s export sectors will have to wait for a recovery in American consumer and business spending.

“As we saw last year, no country is an island, and after a decent finish to 2009, Canada could be waiting another year for truly robust growth,” Shenfeld concludes.

To read the full report, click here.

(09/11/09)