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CBC News
The Bank of Canada has slightly raised its projection for growth in 2011, saying the Canadian economy will benefit from a faster-than-expected recovery in the U.S. this year.
The central bank said Thursday it expects the Canadian economy to grow by 3.5 per cent next year, up from its previous projection of 3.3 per cent.
It says GDP will grow by 3.5 per cent in the first quarter this year from Q4 of 2009. While that’s down from the 3.8 per cent quarter-over-quarter growth it was forecasting three months ago, the central bank now expects the economy to expand by 4.3 per cent in the second quarter and 4.0 per cent in the third quarter and 3.8 per cent in the final quarter of the year.
The Q2, Q3, and Q4 growth estimates are all increases from the central bank’s projections made last October.
“Export growth is projected to be somewhat stronger than was expected last October, owing to a more favourable outlook for the U.S. economy, particularly in the sectors that figure most importantly for Canadian exporters,”
the bank said in its quarterly Monetary Policy Report.
The Bank of Canada substantially hiked its estimate for U.S. economic growth this year from 1.8 per cent to 2.5 per cent.
It says overall growth in Canada this year will come in at 2.9 per cent — down a tenth of a percentage point from its estimate of three months ago.
Still, the overall tone of the new outlook was slightly more upbeat than three months ago.
“Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold.”
Canada fared better in downturn
The central bank says the Canadian economy shrank by 2.5 per cent in 2009. That’s larger than its previous estimate of 2.4 per cent.
But even though real GDP in Canada contracted for three consecutive quarters, “the magnitude of the downturn was more modest than in other major advanced economies.”
The central bank estimated that Canada’s GDP fell 3.3 per cent from peak to the trough of the recession — less than most other advanced economies, even though exports plunged 20 per cent.
“Canada’s relatively solid economic performance, in spite of this trade shock, reflects the resilience of Canadian household demand. Consumer spending barely declined in Canada,”
“Canada has suffered less than many other countries, partly because of its sound banking system and relatively strong household and corporate balance sheets, and also because of the speed and scale of monetary policy actions.”
Employment levels likely bottomed last summer, according to the central bank.
“The deterioration in the labour market appears to have stopped,” Bank of Canada governor Mark Carney told a news conference. But the bank noted that its recent surveys have found that “ongoing weakness in the labour market is nevertheless evident.”
The jobless rate is now hovering around 8.5 per cent.
Inflationary pressures grow
Inflationary pressures in Canada are building slowly. The central bank now expects total CPI inflation in the first quarter will be 1.6 per cent, up two-tenths of a percentage point from its estimate in October. It projects inflation will jump to 1.9 per cent by the fourth quarter of this year, up three-tenths of a point from its last projection.
Core inflation, which excludes the more volatile items in the consumer price index, has been “slightly higher” than expected recently, the bank said. “Nevertheless, considerable excess supply remains, and the bank judges that the economy was operating about 3.25 per cent below its production capacity in the fourth quarter of 2009,” it said.
The outlook for global economic growth this year and next is “somewhat stronger” than it was in October, the bank added. But it warned that “the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.”
On Tuesday, the Bank of Canada left its key lending rate at a rock-bottom 0.25 per cent and reaffirmed its commitment to keep it at that level through June, assuming inflation does not become a concern.
Defensive Investment
By Benjamin Tal
The news of late has been undeniably positive. But the road ahead still has a few more bumps than currently anticipated by the market. Governments all over the world will stop spending and some, in fact, will start tightening their fiscal policies. Central banks will start removing liquidity from the system and interest rates will start rising in the second half of the year. Deleveraging by consumers will continue to limit the ability of households to shoulder a strong recovery, and American banks will still have to deal with massive losses due to their existing exposure to Alt.A and Option Arms mortgages as well as the fragile commercial real estate market. Add to it the real risk that Dubai and Greece’s current troubles represent a potential wave of sovereign debt problems and you have a good reason to believe that the easy money in the stock market has been already made.
Making money in 2010 will be much more difficult. And the theme will be conservative investment. In fact, in many respects, the nature of demand will determine the relative valuation of the stock market. The vast majority of the cash sitting on the sideline in both Canada and the US is concentrated among people age 55 plus. These are also the people that now return to the labour market in order to compensate for the significant loss of wealth they have encountered in the past two years. Given the experience of the recent past and their age profile—these investors’ style will be defensive in nature.
In practical term this means that new money will flow into two main destinations. The most attractive target will be solid and established companies that pay relatively high dividends. This is a typical play for conservative investors that are unsatisfied with a GIC type investment. In Canada, dividend seekers have always looked to telecoms and utilities for healthy dividend yields, and those two sectors indeed top the pack in terms of TSX payout ratios. But there are other groups where dividends now pay out 4% or more of the share price, including real estate, media, banks, and health care. The second group of interest might be fixed income investment in general, and corporate bonds in particular, due to the pervasive focus on capital preservation and the realization that any near-term inflation risk is minimal.
Consumer Outlook improves in Canada
Less fear of job losses in Canada is producing a positive effect on a majority of Canadians who are now more confident about future earnings prospects, according to a monthly consumer confidence survey by Royal Bank of Canada, the country’s largest lender by assets.
“Canadians are becoming more optimistic but … their focus remains on managing day-to-day expenses with many finding it hard to save for their retirement or their children’s education,” said David McKay, RBC’s head of domestic banking.
Some 60 percent of Canadians in an online survey said the economy will get better in 2010, while 17 percent expect it to worsen, according to the RBC Canadian Consumer Outlook report released today. The poll was conducted between Dec. 8 and Dec. 11 and has a margin of error of plus or minus 3.1 percentage points, 19 times out of 20. The bank also said its Canadian Consumer Outlook Index, which aggregates answers on different topics, rose 8 percentage points from its initial reading of 100 in November.
Canada’s economy grew for the first time in four quarters from July through September, signaling an end to the country’s first recession since 1992, Statistics Canada reported in November. The Bank of Canada forecasts growth of 3 percent this year, spurred by consumer spending, after a 2.4 percent contraction in 2009.