I had the good fortune to be invited to an economic forecast breakfast on Friday, hosted by The Economic Club of Canada. A panel of six economists — Warren Jestin of Scotiabank, Douglas Porter of BMO Financial Group, Craig Wright of RBC, Julia Coronado of BNP Paribas, Avery Shenfeld of CIBC World Markets and Craig Alexander of TD Bank — spoke about their outlook for 2013. On the whole, they’re relatively optimistic. We can expect slow growth in Q1 and Q2, but the second half will deliver solid numbers in both the advanced and emerging economies.
I caught four key observations in my notes:
1. Canada might not do too badly
It will underperform the U.S. economy, but the external factors we worried about last year are largely resolved. Global economic growth is expected to fall in the 3.5% to 4% range, which means commodity prices will hold pretty firm. Europe is turning a corner, albeit gradually. China’s slowdown is no longer cause for concern. And the sectors of the U.S. economy that our exporters ship to, such as the housing industry, are recovering. That bodes well for Canadian companies that rely on American customers. Wright says our residential real estate market will cool this year, but we’re not headed for a U.S.-style crash.
2. The U.S. will have its best year since the downturn
The housing recovery will lead Americans out of the funk they’ve been in since the financial crisis. Porter says the U.S. economy has lost about four million jobs since the recession began. About half of those were in the construction trades. So watch for this comeback to have a positive impact on the unemployment rate. Of course there are still fiscal cliff/debt ceiling issues to be resolved. That’ll mean continued uncertainty and slower progress. Still, they’ll do better than 2% gross domestic product (GDP) growth this year. Maybe a lot better.
3. Emerging markets are where the action is
Jestin shared a fascinating observation: Emerging markets, long considered merely a pool of cheap labour, are now providing the global economy with much-needed consumer demand. Chinese tourists spend more than any other country’s travellers, for example. Expect Brazil, Mexico, Russia and Ireland to grow in the 3.5% to 4% range. Peru, Chile, India and Columbia will achieve 5% to 6% growth. And China will come in at 8% relative to 2012.
4. Equity markets will pick up in the second half
To the extent that investors are forward looking — which is to say that they make valuation decisions based on the future earnings potential of the businesses they invest in — we could see stocks perform well in Q3 and Q4. Shenfeld says stock prices are cheap relative to anticipated 2014 earnings. There will be another factor at play, too. Expect the U.S. Federal Reserve to wrap up its quantitative easing program by the end of this year, which will drive investors out of safe havens like gold and back into equities.
All of this cautious optimism runs somewhat contrary to the view that we are in a decade-long deleveraging process known as a balance-sheet recession. Some of us, who believe that both governments and consumers around the world will take about that long to wind down their debt, will be surprised by these projections.
Indeed, Alexander points out that cumulative government debt across the advanced economies is greater than 100% of GDP. We haven’t seen that kind of number since the years that followed the Second World War. At the very least, this explains why the developed world is underperforming relative to emerging economies like China and India.
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