A Summary of Dr. Warren Jestin’s Presentation to Clients on October 2 in White Rock
The global economy has struggled to build momentum since the 2008 financial crisis. Improved prospects in the U.S. and the U.K. have been counterbalanced by renewed weakness in Japan and much of the Eurozone. Growth among the major emerging market powerhouses has been mixed, with China decelerating – though still in the fast lane – India hopefully accelerating and Brazil trying to get out of low gear.
From a Canadian perspective, the revival of U.S consumer spending on big-ticket items like cars and housing has been good news for exporters, particularly with the loonie swooning below 90 cents. Looking ahead, exports and business investment will have to take up some of the slack in driving Canadian growth as consumers and governments become more circumspect about their spending and finances.
Residential construction is receding after a multi-year boom and consumer spending will be tempered by slower job growth and relatively high household debt. Unlike their U.S. counterparts, Canadian households do not have a deep reservoir of pent-up demand for housing and automobiles. While Ottawa is poised to eliminate its deficit, sluggish revenue gains and the need to improve fiscal outcomes in a number of provinces largely preclude additional rounds of fiscal stimulus.
Borrowing costs will remain low with the Bank of Canada tending to lag the U.S. Federal Reserve when it finally starts nudging short-term rates higher next year. Renewed investor interest in safe-haven investments and the dramatic drop in Washington’s deficit will limit the rise in bond yields. Better economic and fiscal fundamentals will also reinforce U.S. dollar strength against a number of currencies, including the Canadian dollar.
Taken together, these factors suggest that Canadian growth will average around two to two and a half per cent through 2015. Building economic momentum beyond mid-decade will require exports to take on a greater role supporting growth, particularly if consumers and governments become more cautious spenders. While a lower Canadian dollar and improved productivity help export competitiveness, diversifying beyond traditional U.S. markets, which still account for nearly three-quarters of foreign sales, has become a strategic necessity.