What do top economists see for 2014?

Canada’s prospects in 2014 will rise with America’s, but we need links to more countries to achieve sustainable growth, say top economists.

In emerging markets, “you are going to see growth that is at least double, and in some countries triple, what we’re going to see in the G8. Structurally, that is going to be the important opportunity,” said Warren Jestin, Scotiabank’s chief economist, at the Economic Club of Canada’s forecasting panel Jan. 7.

Read: Global growth should surprise to the upside in 2014

Domestic demand won’t be enough to keep the economy strong, adds BMO Capital Markets chief economist Douglas Porter. Record vehicle purchases and strong home sales fuelled the Canadian economy in 2013, but he expects those levels to hold steady this year.

So “we really do have to look abroad for that next leg upward,” he says. “The single best piece of news for the Canadian economy in 2014 is that the global, and specifically the U.S., economic outlook is improving.”

Where to look for growth

Jestin predicts China will grow at 7% this year, despite the Chinese government’s target of 7.5%. This is lower than the country’s average historical growth rate of about 10%, he notes, but it still blows away rates in the G8.

For instance, BMO is predicting Canadian GDP to grow by 2.3% this year, which would surpass the under-2% growth of the past two years.

Canada could benefit from China’s economy, which is shifting more toward domestic demand, says Jestin. As the biggest manufacturing market in the world, China is vital for Canadian exporters. Even our service industry could benefit from more Chinese tourists.

Read: What will 2014 bring?

Chile, Peru and Columbia will also be strong performers in 2014, with forecasted growth at 4% each, he adds. Brazil, a former star of the developing world, is facing growth under 3%.

Indonesia, Turkey, South Africa and India, along with Brazil, have been dubbed the Fragile Five, says Julia Coronado, chief economist, North America, for BNP Paribas.

“All five [countries] are having major political transitions this year, and all five have macro fundamentals that are precarious in some way or another,” she explains, noting the continued strife in the Middle East will also have economic implications.

And as the U.S. and Europe recover, risk will shift to emerging markets, says TD vice president and deputy chief economist Derek Burleton, who explains that as the Fed tapers, economies that benefitted from increased global investment could falter.

Read: Equities to keep climbing in 2014, says Russell

Economic indicators

Panel members don’t expect the Bank of Canada to increase its key interest rate in 2014, leaving it unchanged for the fourth year.

“We don’t see the Bank moving until well into 2015,” says Porter.

These decisions have weakened the loonie, he adds. Our dollar has lost 7% over the past year, but compared to the Australian dollar and the Japanese yen, it’s still healthy. He and the other economists say the dollar will end 2014 at about 90 cents U.S., though Burleton says it might go slightly lower.

Read: Canada to grow in 2014

Inflation was also weak last year, note Burleton and Coronado.

“With the Fed embarking on QE3 and Japan opening up the printing presses, there was this notion that central banks would stop at nothing to reflate the global economy, and yet inflation is slowing everywhere,” says Coronado.

She adds QE has masked U.S. economic weakness.

“We speak about the U.S. consumer improving, and I think that is true, but it has come with unprecedented, massive Fed intervention,” she says. Plus, real income growth in the U.S. is stagnant, and two-track consumption has emerged.

“We’ve got the wealthy who enjoy 30% stock market gains,” she says. “Then you’ve got the rest of the consumers with very low wage growth demanding discounts on everything from cars to clothing to healthcare. That’s why inflation is slow, because not everybody is participating.”

Read: How to cope with inflation, deflation and stagflation

Markets in 2014

CIBC chief economist Avery Shenfeld says gold prices will continue to suffer, noting that a strong U.S. dollar, low inflation and rising bond yields will keep the commodity down in 2014. But other commodities, including oil and natural gas, will do well, he says. “I don’t think the market has fully priced in is that demand is picking up.”

U.S. politics and government spending will have less effect on the markets this year, says Craig Wright, chief economist for RBC Financial Group. “[Markets] will probably see through the games the politicians have been playing,” he says. With the majority of federal spending cuts completed, a weight has been lifted off the economy.

Read: Paying down debt top priority for 2014

But as American banks implement the new rules brought in by the Dodd-Frank Act, these institutions “are not going to be aggressively expanding balance sheets. [So,] the credit we rely on to usually achieve trend growth is just not really there right now,” says Coronado.