Canada losing steam: Desjardins

Financial markets are still sensitive to any unexpected event, says Desjardins Group Economic Studies team.

“The fiscal cliff saga in the United States should wrap up soon and remove a major source of uncertainty, but the extent of the impact on North America’s economy and the reaction from the markets will depend on the outcome,” states François Dupuis, Desjardins Group vice-president and chief economist.

The bank says Canada’s losing steam, as it increasingly feels the impact of the weakness in global demand.

What’s more, we have a public sector that is in austerity mode, and a housing market that is going into a slowdown. Employment’s good performance could have positive impacts on household income and consumption, though, despite their high debt loads.

“Businesses should continue to invest to deal with low productivity, but some could also lose enthusiasm as a result of weak demand for their products,” emphasizes Yves St-Maurice, senior director and deputy chief economist.

The current environment is less favourable to Canada’s economy; our real GDP should rise by 2.0% in 2012 overall, and by 1.8% in 2013. Then, it should close in on potential in 2014 with growth of 2.5%.

Commodities, especially oil, remain a major driver for Canada’s economy. This largely explains the regional disparities, since Western provinces will once again be the best performers in 2013 and 2014.

Longer than expected in Europe

The recession will persist longer than forecast in the Eurozone, although it will remain fairly slight.

The region will return to positive growth in 2014, with real GDP growth forecast to be 0.6% and 2013 should see a 0.4% contraction. Concerns about China’s economy have also eased because the latest indicators are showing slight signs of an upswing.

Unsurprisingly, issues surrounding the fiscal cliff and the debt ceiling are monopolizing the attention in the U.S. The tension could rise as the end of the year closes in; after rising 2.2% in 2012, the U.S. economy’s growth could retreat to 2.0% in 2013 due to the outcome of the current negotiations.

“Growth should accelerate subsequently, going to 2.8% in 2014, boosted by a recovery by the real estate market, consumption and business investment,” adds Dupuis.

Signs of hope

And there’s reason for hope when it comes to positive market returns.

North America’s stock markets should benefit from a better situation in mid-2013 and 2014, with returns better than those expected from the bond market.

Failing a solid economic recovery, and due to the elevated risks of a skid, central banks will continue to be expansionary.

“The Bank of Canada will also make sure the recovery is well underway before it goes into action, and this should not be confirmed until mid-2014,” concludes Desjardins’ economists.