Canada’s economic recovery will lose steam in 2013 and its main stock index will end the year in negative territory. Those two predictions come from Sadiq Adatia, chief investment officer of Sun Life Global Investments. He and I spoke on Thursday.
“The Canadian economy is in trouble,” he told me, answering a question we posed in a blog post last June. “People are overly optimistic about the Canadian economy. I think it is going to have a tough time in 2013. And I think the Canadian stock market will actually be negative next year — somewhere in the 5% range.”
Adatia said housing, consumer debt and factors outside the country could all contribute to a tough year.
Activity in the residential housing sector is slowing, probably as a result of Ottawa’s move to tighten the country’s mortgage lending rules. Expect to see that push housing prices down in the first half of 2013. That’ll lead to rising unemployment in the construction trades.
“Canadians will feel a little bit worried,” said Adatia. “They’ll tighten their belts a little bit. Growth will slow because they won’t be spending.”
For many, debt will contribute to that worry. Statistics Canada reported Thursday that household credit market debt across the country reached 164.6% as a percentage of disposable income in Q3 — another record high. The only good news is that the increase over the previous quarter was smaller than the jump measured between Q1 and Q2.
Globally, the warning signs are clear. China’s slowdown — no matter how soft its landing proves to be — will hurt commodity prices. The eurozone will continue to make business leaders nervous in 2013. And of course Canada’s economy is significantly dependent on the strength of the U.S. recovery.
“Canadian and U.S. corporations have all cut back on their spending because of the fiscal cliff,” Adatia told me. “Q1 will be a tough quarter, even if you see a resolution … In the first half, I think you’ll see negative results in the Canadian economy and the Canadian stock market. There will be a bit of a bounce back in the second half.”
Three additional predictions:
- Canada’s gross domestic product will grow between 1% and 2%. “We’ll be at the lower end of that — maybe 1% — in the first six months,” said Adatia. That number could improve in the second half.
- The overnight rate will stay at 1%. A consensus had formed around an expected increase by the Bank of Canada in the second half of 2013. Adatia believes that’s off the table. “The U.S. has already said that they can’t raise rates until 2015,” he said. “[Bank of Canada governor Mark] Carney’s hands are tied. Canada can’t do anything until 2014.”
- Neither inflation nor deflation will be factors in 2013. “I don’t think either will be a concern in the next couple of years,” Adatia told me. “As we get further out, then I think the U.S. is where we worry about inflation. Today’s problem is just to get growth going again.”
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