Slow growth for next five years

Expect slow economic growth for the next four to five years, says economist A. Gary Shilling.

“De-leveraging periods after major financial crises usually take about a decade. We’re five years into this, [and there’s] another five years to go,” Shilling says.

He and Martin Barnes, chief economist at BCA Research, each presented their market predictions at the CFA Society Toronto’s 56^th annual forecast dinner Oct. 1.

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But those who say a sluggish North American economy is here to stay are wrong, Shilling adds.

“That’s what I call theory follows fact,” he says, adding that those analysts are underestimating the long-term strength of the U.S. economy.

A higher birth rate than other developed countries, an entrepreneurial spirit and low union membership are some of America’s existing economic advantages, he says.

As the economy continues to recover—which he predicts will happen with a GDP growth rate of 2%—the dollar will also strengthen.

The country is also moving toward energy independence, and will rely less on foreign investment as consumers spend more, he adds.

Right now, Americans are paying down debt and saving cash, and that is cancelling out the effects of fiscal and monetary stimulus, he says.

Barnes agrees the economy will continue to improve, and predicts a slightly higher rate than Shilling.

“My bottom line on the economic outlook is that you’ll feel better in a year’s time, but you still won’t feel great,” he says. “We could get back to 3% [growth] in North America without too much difficulty.”

But says consumer debt in Canada–163% of income–is unsustainable.

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Neither Shilling nor Barnes think inflation rates will rise.

“Inflation is going to stay pretty close to zero, or where it is now. The risk is that [we’ll] go into deflation, not inflation,” says Shilling.

They also agreed the stock market is due for a correction.

On bonds, Shilling and Barnes say they will rally.

“Ten-year bond yields will still be less than 3.5% in a year’s time. They will go up from here, but they’re not going to go up to a level that’s a problem, says Barnes.

The loonie could get back to parity with the U.S. dollar in the next year based on strong commodity prices, Barnes says.

But Shilling adds the U.S. dollar is due for a boost as the recovery continues. It will be helped along by the underlying strength of American financial markets, and the lack of an alternative currency for trading and investing.

But he’s concerned the credibility of the U.S. political system could affect the dollar’s strength as issues like government shutdowns and legislative gridlock become more common.

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