Global woes pull at Canada: CIBC

Canada’s economy will see lacklustre growth of 2.1% both this year and next, says a CIBC World Markets forecast released today.

Issues overseas and diminished spending power among Canadian consumers will work in concert to keep a lid on growth.

“The global economy hasn’t fallen off a 2008-style cliff, but it’s been too close to the precipice for investor comfort,” says CIBC chief economist Avery Shenfeld. “Some emerging markets are on the boundary of a hard landing, Europe is mired in recession, and the U.S. is moseying along on its half-speed recovery.”

Taken together, problems in Europe – particularly tension over willingness to engage in meaningful austerity measures – combined with China’s need to prime its pump, a strong Yuan, and a sluggish U.S. recovery caused CIBC forecasters to downgrade their already-conservative outlook for worldwide economic growth to 3%, the lowest since the recession.

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Impacts for Canada

That long-term slow worldwide growth is bad news for Canadian exports.

“While a host of indicators continue to signal impressive economic momentum in resource-rich provinces like Alberta and Saskatchewan, we expect a less voracious appetite for commodities in key emerging markets,” says Benjamin Tal, CIBC’s deputy chief economist. “The associated pullback in commodity prices could, at the margin at least, mean less aggressive investment, job creation and ultimately GDP growth for Canada’s most resource-leveraged regions.”

The report notes that while in recent quarters, rising U.S. auto sales, energy price relief and a cheaper loonie have contributed to economic resilience in Ontario, the potential for a withdrawal of U.S. fiscal stimulus in 2013 could slow that growth, and further cut demand from emerging markets that’s benefited goods producers here.

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“That could dent job creation in Canada, as hiring has quickened recently on the bet that external demand will improve,” Tal says. “Almost all of the job creation seen in the last six months came from the tradeable sector, namely manufacturing and natural resources that depend heavily on foreign demand.”

And, simultaneous to headwinds facing Canadian exports, Tal says Canadian consumer demand is on the wane. “Low interest rates for the past few years have kept the economy alive while the world around it crumbled,” he says, “and while that bought the Canadian economy time, flash forward a few years and the domestic economy has yet to find sources of growth that can survive if policy makers pull the plug on the low-rate IV-drip.

“Years of free-flowing credit in Canada have seen Canadians overshoot by a wide margin what could be considered normal consumption relative to population trends. So after gorging at the table of plenty for several years, Canadian consumer appetites may already be satiated.”

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Global outlook

Here are the bank’s GDP forecasts for selected countries and regions:

China – Forecast marginally lowered to 7.8% this year. The bank notes government policy should accelerate growth to 8.5% in 2013, and that after excessively tightening to contain a housing bubble and inflation, Beijing is now reversing course, with below-target inflation giving policy markets a green light.

India – Stubborn inflation may hold back India’s central bank. As a result, the bank slashed its growth forecast for the formerly shining economy to 5.5%.

Europe – The blueprint for a rebuild of Europe’s economic motors isn’t hard to outline: a kinder, gentler path of fiscal restraint in the periphery, with much more support for those countries refinancing needs from stability funds and central bank purchases, preferably unsterilized. The currency zone should generate modest, but still sub-1% growth in 2013.

U.S. – Political pressure for government restraint will drag on a U.S. economy that’s otherwise nicely coming together, with growth running just under 2%.

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