Canada’s economic future positive, top BMO economist says

Canada’s economic outlook remains “very positive,” with very few risks to growth according to one of the country’s most recognized economists.

Speaking to an audience of certified general accountants this week, BMO Capital Market’s chief economist Dr. Sherry Cooper addressed a broad array of key economic factors that will affect Canada in the near future. In general, she says Canada is in a good position to continue solid economic growth with little risk of stalling.

Cooper pointed out that Canada hasn’t had a real recession in 15 years, and in her opinion there is no recession in sight. Instead, she sees the Canadian economy growing at about 2.5% to 3.5% over the next year.

This moderate growth will be spurred on by generally steady Canadian consumer confidence, oil prices stabilizing at about $55 to $60 a barrel and a Canadian dollar she estimates will hover around 85 cents US.

Canadian growth could be much higher, she says, but a manufacturing slowdown in central Canada — particularly in Ontario’s auto sector — has offset the economic boom out west.

“Thanks to the rise in commodity prices, Western Canada has been booming. Central Canada, on the other hand, has felt the impact of a strong dollar,” she said. “The automobile industry has caused considerable pain in Ontario.”

Cooper explains that the manufacturing decline will likely continue due to a Canadian dollar that is strongly attached to commodity prices, and as those remain high, so will the dollar. This should not affect inflation though, as the Canadian dollar’s purchasing parity with the United States is about 83 cents US.

This parity exists mainly due to the steady growth, with low inflation being experienced by both countries. This has become the norm for the North American economy right now and can be observed in the yield of both Canadian and American bonds, Cooper said. Stable inflation has boosted the confidence of private issuers of bonds, such as corporations.

“Bond yields are extraordinarily low. I had the pleasure of interviewing Alan Greenspan yesterday and he commented on just how unusual the shape of the yield curve is. We have an inverted yield curve, both Canada and the United States. [U.S.] interest rates are higher than in Canada, but in both cases, the 10-year government yield is below 5%, which is dramatically low in Canada’s case,” Cooper said. “Greenspan commented that, unlike the past, the inverted yield curve today is not the precursor of recession. It is an indicator of the global demand for income-producing products.”

One area in which Cooper is noticing a difference between the U.S. and Canada is the housing market. Cooper said the American housing market has faced a serious decline, and that more than ever, Americans using the equity in their houses to borrow. Both the U.S. and Canada have a record proportion of homeowners — 69% and 67% respectively — but despite the closeness, other factors point toward much better homeowner security for Canadians, which bodes well for their future financial security.

Cooper says the Canadian statistic is remarkable “because in Canada, mortgage interest is not tax deductible. In the United States, even property taxes are tax deductible. Canadians are not only buying homes, but Canadians in general pay down their mortgages before they retire.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com