High flying Canadian economy will see loonie hit $1.05 by end of 2008: CIBC World Markets
Canadian dollar will trade at biggest premium since 1960 TORONTO, Oct. 15 /CNW/ - CIBC (CM: TSX; NYSE) - The Canadian economy will outperform the U.S. economy in 2008, despite the loonie reaching a nearly a half-century high of $1.05 against the greenback, finds CIBC World Markets latest economic forecast. "The loonie's flight is far from over," says Jeff Rubin, Chief Economist and Chief Strategist at CIBC World Markets. "By the end of next year, you'll get as much as a nickel back when you trade your loonies for greenbacks, the biggest premium since 1960." The forecast finds that across a wide spectrum of assets, the tables have suddenly turned between the American and Canadian economies. Canadian real GDP growth is outpacing the U.S.; American housing prices continue to fall on mounting foreclosures while Canadian housing prices continue to rise due to a surging economy; and the resource-based TSX is set to outperform the S&P 500 for the fourth straight year. Mr. Rubin notes that in the past, weakness in the American economy would spill over the border in a hurry, particularly when a par Canadian dollar exchange rate left exporters fully exposed. But with the developing world, not the U.S., now driving global resource demand, the umbilical cord that has always connected the Canadian economy to the much larger American market is being severed. That's already becoming apparent with Canadian real GDP growth poised to surpass the U.S. in a year when the Canadian dollar appreciated from 85 cents to parity. "Canadians are getting richer compared to their American neighbours, after having fallen so far behind during the IT-driven economy of the 1990s" says Mr. Rubin. "At the heart of this reversal of fortune is the huge shift in the global terms of trade over the last decade, which has seen economic value- added migrate from information technology back to resource rents under the ground. "Nowhere is that shift more evident than when comparing soaring crude oil prices against stagnant or plunging technology prices. It takes only a third as many barrels of oil to buy a basic computer as it did at the start of the decade, when Silicon Valley drove the world economy." The CIBC World Markets economic forecast finds that rising resource rents are continuing to swell corporate earnings, personal income and government tax revenue in Canada. It notes that with consumer spending, business investment and government spending all well financed, the domestic economy will be firing on all cylinders. The story in the U.S. economy is much different. Tumbling construction, business caution on inventories, and a consumer sector hit by credit concerns threaten to take GDP growth to near zero in the fourth quarter with not much better in the first quarter of 2008. "A much stronger domestic economy north of the border will in turn translate into divergent monetary policies in the two countries with the Federal Reserve Board following through with another 50 basis points of easing while the Bank of Canada remains on the sidelines," adds Mr. Rubin. "With interest rate spreads turning against the greenback, and commodity prices buoyant, the Canadian dollar should climb to a five per cent premium against the U.S. dollar by the end of 2008." The rising loonie and U.S. economic weakness is hurting Canada's manufacturing sector, but this part of the Canadian economy is becoming increasingly marginalized. The sector is approaching its lowest share of GDP in the post-war period. Both the auto and lumber sectors are feeling the full brunt of a U.S. economic slowdown, but the losses in manufacturing are being readily offset in today's economy. The bank notes that the recent loss of almost 300,000 manufacturing jobs has been more than off-set by job creation in other sectors which has produced a three-decade low national unemployment rate. In fact, once measurement differences are accounted for, Canada's jobless rate will fall as low as the U.S. rate next year for the first time since 1982. In the past five years, no industry has hired more workers or grown production faster than construction. In addition to heightened residential activity, Canada has witnessed a private and public sector investment boom. The former aims to capitalize on global growth opportunities, with the latter made possible by surging government revenues. Government stimulus is apparent in the labour market, with the public sector share of employment at a decade high. The report finds that healthy budget surpluses indicate further government-related hiring may be ahead, although it notes that investments in social programs need to be balanced against other priorities. It also indicates that given years of progress on addressing the federal debt and with the fiscal imbalance largely addressed, the pace of federal debt reduction can now be scaled back and the time is ripe for meaningful tax relief. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/foct07.pdf. CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.