Canada's economy growing, but global risks loom
BMO economist Douglas Porter (MORRIS LAMONT/QMI Agency)
TORONTO -- Canada will likely see a second year of modest economic growth in 2012, but is highly vulnerable to turmoil in Europe, the United States and elsewhere, some of Canada’s top economists predicted on Thursday.
The country, which fared better than most major Western economies in the global financial crisis, could also lag U.S. growth for the first time since the recession.
But economists with Canada’s biggest banks warned forecasting is tougher than usual given uneven global growth, the impact of ultra-low interest rates and foreign political uncertainty.
“The crystal balls are unbelievably cracked and cloudy and the reason is that there are big risks out there, and the big risks all have a political dimension to them,” said Craig Alexander, chief economist at Toronto-Dominion Bank.
These risks include Europe’s ability to control its debt troubles, as well as geopolitical tensions and the impact on oil prices, economists said.
“We are going to continue to have a two-speed world economy with strong growth in the emerging markets, but slowing growth in the emerging markets,” said Alexander.
“In the advanced world, we’re going to see relatively modest growth at best and, at the end of the day, we’re looking at a recession in Europe. The question is: is it going to be mild or significant?”
In the case of North America economic growth will be modest to moderate, he added.
Another key political risk is the potential for big fiscal drag in the United States and its longer-term impact, said Avery Shenfeld, chief economist at CIBC World Markets.
“What does 2013 look like? My view is not a whole lot better than 2012. The problem will be that in the U.S., as they defer fiscal tightening for another year, 2013 is set up to have a huge fiscal tightening hit the U.S. economy,” he said.
“Not only do the Bush-era tax cuts expire, but the temporary payroll tax reductions, unemployment benefits will expire, and the first cuts that were enacted as part of the debt ceiling deal all hit as well.”
However, Doug Porter, deputy chief economist at Bank of Montreal, said one bright spot in 2012 will be the performance of the U.S. economy compared to Canada.
“After a prolonged period of relative outperformance versus the U.S. and much of the industrialized world, it looks like Canada’s star will shine less bright in 2012,” Porter later wrote in a research note.
He expects Canada’s real GDP growth to trail slightly behind the U.S. pace — 2.0 percent versus 2.2 percent — following six consecutive years of faster growth in Canada.
That view is not universal. Craig Wright, chief economist at Royal Bank of Canada, sees Canadian growth in 2012 at around the 2.5 percent range.
The forecasts from economists at Canada’s five big banks come as Canadians are growing less confident the landscape will improve in 2012, according to an annual survey by the Economic Club of Canada and pollster Pollara Strategic Insights, released on Thursday.
Only 25 percent of respondents expressed optimism about the economy in the latest survey, down from 36 percent in December 2010, and 54 percent in 2009. Seventy percent believe Canada is already in a mild recession.
“If last year I reported that Canadians were cautious and retrenching, then this year I have to state that they are now seriously concerned and worried,” Michael Marzolini, chairman of Pollara, said in a speech at the Economic Club of Canada’s annual economic outlook forum.
“This year’s results are the most pessimistic in 16 years across all the indicators that we have been testing since 1985,” he said.
The online poll of 2,878 respondents was conducted in mid-December, providing accuracy to plus or minus 1.8 percent, Pollara said.