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Unspectacular growth numbers nothing to panic about, top economists advise

TORONTO, Ont. - The global and Canadian economies are shifting from a period of acceleration to a period of cruise control, according to top economists, and that is certain to create temporary headwinds for carriers looking to aggressively...


TORONTO, Ont. – The global and Canadian economies are shifting from a period of acceleration to a period of cruise control, according to top economists, and that is certain to create temporary headwinds for carriers looking to aggressively raise rates this year.

Both Scotia Bank Group’s senior economist Carlos Gomes, the opening speaker at our annual Profitability Seminar held in partnership with Dan Goodwill & Associates, and Robert Hogue a senior economist with RBC Royal Bank, who spoke at the recent SCL-CITA annual conference, forecast continuing – albeit “unspectacular” – growth for the economy. Their forecasts were later supported by the data from a powerful new indicator of economic events in this country, the newly unveiled Canadian Manufacturing Purchasing Managers’ Index. The index was launched by Royal Bank of Canada in association with Markit, a global financial information services company, and the Purchasing Management Association of Canada (PMAC).

Gomes attributed the weakening economic numbers to the global aftereffects from the natural disaster in Japan.

“In March, car plants were operating at 100%. Now they’re operating at 50% because of a parts shortage and things will probably stay that way through June before they ramp up again by July or August,” Gomes said. “The soft patch is temporary. Globally most of the key indicators are positive.”

The health of the US market is critically important to Canada since about one third of every Canadian dollar is dependent on trade and the US absorbs three quarters of our exports. UG GDP growth in the first quarter was unspectacular however, after a strong close to 2010. But Hogue and Gomes believed the economic trouble will prove fleeting.

“We believe this will be temporary. We are not overly concerned about the slowing of growth in the US in the first quarter,” Hogue said.

Gomes and Hogue expect the Canadian economy to growth at around 3% to 3.2% in 2011.

“I expect Canada to rank number one among the G7 nations in terms of growth. Relatively speaking we are doing quite well and will do so again next year. But that also has to do with the weak performance of the other G7 nations,” Hogue said.

The RBC PMI, which is based on questionnaire responses from a panel of purchasing or senior executives in more than 400 manufacturing companies in Canada, reflected both the current shift into cruise control and Hogues’ and Gomes’ assertions that it’s nothing to be overly concerned about.  The headline RBC PMI registered 54.8 in May, down from 56.3 in April.

Nevertheless, the latest reading posted above the 50 no-change level that separates growth from contraction and signaled an improvement in overall business conditions for the eighth month running.

The downward trend in the PMI reflected weaker expansion of both output and new orders for Canadian manufacturers. However, job creation remained solid and broadly similar to that registered during the previous survey period.

“The overall index fell slightly during May with declines evident across most of the key components and across all of the regions,” said Craig Wright, senior vice-president and chief economist, RBC. “This aligns with our outlook for a moderation in Canadian economic growth in the second quarter of the year after a robust start to the year.”

Wright added, however, that the slowdown will be temporary and does not signal that fears of a double dip recession are worth considering, echoing the comments of Hogue and Gomes.

“We are seeing an environment of unevenness and uncertainty…but volatile data is typical of turning points in the economy. I am not shocked by the volatility,” Wright said.

Both Hogue and Gomes pointed to several indicators within Canada and globally to show there is reason for optimism long term despite the current slowdown:

Inventories: Inventories in the US remain at very low ratios and that will continue to support global trade growth. In fact, global trade levels are already above where they were prior to the recession in 2008. The American Trucking Association’s tonnage index correlates well with US industrial growth and has been growing in excess of 5% year-over-year. Industrial production in China is growing at a 15% clip and Germany’s industrial production is also strong. “We have recovered what we lost and are at a new high point. That is very important,” Gomes emphasized.

Employment: Hogue believes this is the most important indicator to track right now as job growth is critical to the health of several economic sectors and drives government policies.  The jobs scenario looks much better north of the border where we have actually gained about 100,000 jobs compared to pre-recession levels. In the US, however, where the recession cost the loss of about 8.7 million jobs, only about 20% have been recovered to date. But Hogue believes the corner has been turned. “It’s not going to be smooth sailing but the job creation machine in the US is going into gear,” Hogue said.

Housing: The Canadian housing market never did collapse like it did in the US and contributed to the softer landing experienced north of the border during the recession. Hogue expects housing starts in Canada to stay in line with demographic fundamentals but for the housing market overall to be slightly weaker than last year. In the US, after such as disastrous fall, the housing market can only improve. Housing affordability is actually now at a record high in the US, according to Gomes.

Canadian dollar: The meteoric rise of the Canadian loonie has made it difficult for Canadian manufacturers to remain attractive to US buyers and greatly reduced southbound hauls for Canadian carriers. Neither Hogue nor Gomes saw any relief in sight.  “The Canadian dollar will continue to strengthen and by the end of next year it will be at $1.09-$1.10 in comparison to the US dollar,” was Gomes’ prediction. The reason behind the continuing high value of our dollar will be high commodity pricing, which is a net benefit for Canada’s economy albeit a real test for Canadian manufacturers having to deal with both higher energy costs and shrinking exports due to what the high dollar does to the price of their goods in the US market. Hogue expects the Canadian dollar to remain above parity till mid next year, peaking at $1.06 before falling a few cents below parity. If either of those predictions proves true it will mean our dollar will be above parity in comparison to the US greenback for the longest period of time since 1976.

Interest rates: Both Hogue and Gomes expect interest rates to rise over the course of the year but for monetary policy to remain “very stimulative.”  “The Bank of Canada will probably start raising rates again during the summer. By next year expect rates to be at about 3% but that level should be considered still stimulative to the economy as long as rates are below 3.5%,” Hogue said. Gomes was more conservative in his forecast, expecting the Bank of Canada’s rate to go up to 2% next year.

Oil prices: Both Hogue and Gomes felt they had better news about the future of oil prices. Both expected oil prices to settle down but remain elevated, attributing recent spikes to a great deal of “risk premium” associated with geopolitical issues rather than supply and demand fundamentals. “As those issues resolve, that risk premium will drop,” Hogue said. “I expect crude prices to drop to US$96 per barrel and to hit US$102 per barrel for 2012. The long range forecast is about US$100 per barrel. I am not in the camp of peak oil prices of $150 to $200 per barrel.”

Government and household debt ratios: Both Hogue and Gomes said these have the potential to be disruptive to future economic growth, particularly in the US. In Canada the government’s deficit rose significantly during the recession but is still at 4.5% of the nation’s GDP. In th
e US it has hit an alarming 11% of GDP ratio. Household indebtness, however, has increased substantially in both countries and Canada is now on par with the US when looking at consumer debt to income ratios.

“That’s worrisome. This is something to track closely but it doesn’t spell imminent disaster,” said Hogue. “It’s still manageable because interest rates are low making it easier to service the debt. If interest rates rise, that would be much harder to do.”


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