Economists spell out Canada’s best- and worst-case scenarios for 2012


From Monday's Globe and Mail

The Canadian economy went on a roller-coaster ride in 2011: The year began with a bang, but momentum wobbled in the second half. So what’s in store for 2012? Most economists see slow growth, with an average forecast of 2 per cent for the year. But opinions are split on how it will play out.

THE BEAR: Beata Caranci, deputy chief economist (U.S. and international), Toronto-Dominion Bank
1. You see the economy growing about 1.7 per cent this year. What will drive this growth – or hold it back?
We expect further deterioration in financial conditions in early 2012 alongside a deep recession taking root in Europe. … Because much of Canada’s performance is dependent on global events, the knock-on effects will scar growth by weighing down consumer and business confidence, and by resulting in softer exports and commodity prices.
2. Where do you see the currency?
If European turmoil intensifies, investors will flee to the safety of the U.S. dollar, [to the detriment of] the Canadian dollar, which would likely slip to roughly 90 cents (U.S.) in the first half of the year.
3. Canada’s jobless rate is 7.4 per cent. How will the labour market fare in 2012?
Canadians probably have to brace for an unemployment rate that is likely to go up in 2012 … in the 7.5 to 7.7-per-cent range.
4. The Bank of Canada held the line on interest rates in 2011. What will happen this year?
2012 will be marked by more of the same when it comes to the Bank’s overnight interest rate. The uncertainty and financial market turbulence created by Europe coupled with a slowdown in the broader global economy is not an environment that will be conducive to higher rates in Canada. And, against this backdrop, inflationary pressures should ease in the coming year, facilitating the decision to leave rates unchanged at ultra-low levels.
5. Inflation got a little hotter this year. What’s your outlook in 2012?
Much of the momentum in inflation this year can be attributed to the runup in energy and food prices, which likely also seeped into the prices of other goods and services. But, commodity prices have eased in recent months … given the prospect for weaker economic growth and a rise in the unemployment rate, we think inflation will hold below 2 per cent next year.
6. Consumers remain heavily indebted. What’s in store for them?
The prognosis is not good for 2012. … Soft job creation will equal stagnant wages, and asset growth will be constrained by ongoing equity market volatility, low interest rates and cooling home prices. … debt levels relative to incomes will hit new highs in 2012. As debt burdens keep rising, [consumer spending] will show pretty shallow growth of 1.6 per cent.
7. In the global economy, where will be the strongest and weakest pockets of growth?
Looking at advanced economies, without question, the weakest pocket will be the euro zone, which we think will contract by roughly 1.2 per cent. Both [the U.S. and Canada] are expected to post real GDP growth just shy of 2 per cent.
Among the emerging market economies, all seem to be gearing down, but some more so than others. We think the Asian NICs [newly industrialized countries], Brazil and perhaps even India will slow down to a lesser extent than China.
8. What are the greatest risks next year to the Canadian and global economy?
The greatest risk to Canada and the global economy are one and the same – a misstep by European policy leaders that results in a global financial crisis.
9. What are you planning on reading over the holidays?
I’m doing a right-brain, left-brain thing. I’m reading Boomerang and The Girl Who Played with Fire … I’ll let you know which one kept me up at night.
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THE BULL: Dawn Desjardins, assistant chief economist, Royal Bank of Canada
1. You see the economy growing about 2.5 per cent this year. What will drive this growth – or hold it back?
Our forecast that U.S. economic growth will gear up a notch and that the worst for the euro-zone crisis will occur early in the year sets up Canadian exports to grow at the fastest pace since 2000. Businesses, which have recorded strong earnings growth and are flush with cash, are also going to support growth … helped along by the consumer although the pace of consumption is likely to grow by a moderate 2.1 per cent next year.
A modest paring of inventories after two years of rebuilding, declining government investment and slowing residential construction activity will weigh on the economy.
2. Where do you see the currency?
Canada’s dollar is well-supported by fundamentals … [but] during periods of uncertainty investors prefer to be in … the U.S. dollar. So we forecast that Canada’s dollar will trade around parity.
3. Canada’s jobless rate is 7.4 per cent. How will the labour market fare in 2012?
The bump-up in the pace of U.S. growth in the fourth quarter is likely to restore confidence in Canada as our largest trading partner gears up. [We] anticipate a return to a more sustainable pace of hiring [and that] the unemployment rate will gradually decline … to 7.1 per cent by the end of 2012.
4. The Bank of Canada held the line on interest rates in 2011. What will happen this year?
[We believe that] European leaders will be able to forge a plan to solve the sovereign debt crisis … investors are likely to become less risk-averse if they believe that a solution is on the way. … Our base case forecast for growth of 2.5 per cent in both Canada and the U.S. sets the stage for the Bank of Canada to start to unwind some of the [current] stimulus. By the end of 2012, we expect the overnight rate will be 1.5 per cent (from 1 per cent now). Further rate increases are likely in 2013 as long as the U.S. expansion continues and European economies return to health.
5. Inflation got a little hotter this year. What’s your outlook for 2012?
We anticipate energy prices will stabilize … The core rate has edged up in recent months partly due to increasing prices for motor vehicles. Now that the supply disruptions … of 2011 have been alleviated, these prices will reverse course. We expect both the headline and core inflation rates to average less than 2 per cent in 2012.
6. Consumers remain heavily indebted. What’s in store for them?
Our expectation that the labour market will hold up, and that interest rates will be very modestly higher by the end of next year, suggests households will continue to be able to service their debt [while moderating their spending].
7. In the global economy, where will be the strongest and weakest pockets of growth?
Canada and the U.S. are looking good in 2012 with growth averaging 2.5 per cent while the euro zone is expected to … gradually recover [from recession] over the course of 2012. China and other emerging nations are showing signs of flagging with average growth likely to be 5.5 per cent in 2012, down from 6.3 per cent in 2011. However EM [emerging market] growth is still expected to run much faster than in 2009, when it increased by just 1.5 per cent.
9. What are the greatest risks next year to the Canadian and global economy?
That the European sovereign debt situation continues to run in crisis mode, and that jitters about government debt damage sentiment in the U.S. as well.

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