CIBC: Recession hangover gutting growth

Although things are looking quite rosy, the road to a full economic recovery will not be without its thorns, states a CIBC World Markets Inc. report.

In the economic report, CIBC sees Canada’s economy facing muted growth prospects through 2011 a recessionary hangover continues abroad and headwinds emerge at home.

“The Great Recession that shattered global growth in 2008-2009 is now water under the bridge but the ‘Great Disappointment’ of a sub-par global recovery will be with us for a good while longer,” said CIBC’s chief economist, Avery Shenfeld.

Shenfeld has cut his target for economic growth to 1.9% in 2011 due to what he sees as the softening of many sectors of the Canadian economy, a downbeat export picture, the competitive challenges of a strong Canadian dollar, falling house prices and the reduced use of credit that could lead Canadian consumers to trim spending growth.

“The Bank of Canada will wait until spring before renewing a very gradualist path to normalcy in interest rates.” That pause would slow capital inflow and allow a huge trade deficit to take the Canadian dollar down to 92 cents U.S. over the next six months before recovering when rate hikes resume later in 2011,” he predicts.

CIBC’s forecast for the U.S. is anything but sunny. CIBC has scaled back U.S. growth to 2.6% this year and a “paltry” 1.8 per cent next year. This is because of a “major drag on growth” and the end of stimulus measures.

Overseas economic growth is looking lopsided, the report states. In Asia, emerging economies “still have room to grow their domestic consumer base, with households not having come through a borrowing binge, and a long building period ahead to fully modernize private and public infrastructure. But they will still feel some of the chill as demand for their exports decelerates,” said Shenfeld. CIBC forecasts GDP growth in China to tip the scales at 10.1% this year, and 9.3% in 2011.

By contrast in the Eurozone, growth is showing signs of slowing after a burst in the second quarter.

“The credit crunch is still likely to be a restraining factor,” said CIBC economists Peter Buchanan and Krishen Rangasamy. “That, together with a still-weak labour market, means that consumer demand should remain soft. Forthcoming austerity measures will also keep a lid on domestic demand, and renewed concerns over sovereign debt risks will weigh on business and financial market sentiment.”

As a result, CIBC expects that the European Central Bank and the Bank of England will take time in raising interest rates.

The complete CIBC World Markets Inc. report is available here.