U.S. growth to outpace with rate hike in September, Bank of Canada to hold steady
TORONTO, June 3, 2015 /CNW/ - CIBC World Markets has cut its 2015 Canadian growth forecast to a paltry 1.4 per cent as weak commodity prices and slowing emerging market economies have not provided the expected lift to a sluggish domestic economy.
"We're slashing our 2015 growth forecast for Canada by more than a quarter point to only 1.4 per cent, stung by a downside miss in Q1, and an end-of-quarter picture that depressed the Q2 outlook," says Avery Shenfeld, Chief Economist with CIBC.
Mr. Shenfeld notes that while he expects commodity prices to rebound somewhat this year, slowing global growth will keep them well below previous peaks. The new CIBC forecast has dropped global growth by nearly a half point to 2.9 per cent, the softest since the recession. "That owes to a divergence between an improving developed world and a deterioration in emerging markets.
"U.S. fundamentals still look healthy despite the poor Q1 outturn. Unless America's business leaders are totally out of touch, their brisk hiring points to solid demand growth ahead. Political risks in Greece - and Spain later this year - won't be enough to take the Eurozone off a clear recovery path, with lots of headroom for non-inflationary growth. But a downshifting in China and recessions in Russia and Brazil are contributing to a much less impressive overall pace."
While he expects current stimulus efforts to boost growth in emerging market economies next year, secular forces, including slower trend growth in an aging west, will limit the bounce to 3.6 per cent in 2016, well below the nearly 5 per cent global growth pace seen in the five years leading up to the last recession.
With a less-globally-exposed economy, he forecasts that the U.S. economy, with much more pent-up demand in its less-indebted household sector, will grow faster than Canada this year. "Since Canada outpaced the U.S. during the recession and early recovery, divergence in growth has already generated a convergence in economic slack, necessitating a parallel convergence in short term rates. The Fed will carry through on Yellen's clear intention to hike rates this year. But a soft Q1, and tame core personal consumption expenditures, will see the Fed wait until September to pull the trigger, needing more assurance that growth has rebounded.
"Slower trend growth and reduced incentives for capital spending at any given interest rate will see central banks and bond markets settle at what, by historical standards, will still be unusually low yields. That's just the next chapter in a story dating back to the 1980s, in which successive cycles have required lower average real interest rates to reach and stay at full employment."
Mr. Shenfeld does not see much movement for the Canadian dollar, calling for it to drop a few cents after the first Fed hike, then recovering modestly. He also expects the Bank of Canada to stand firm on interest rates. "Governor Poloz's optimistic forecast for the next six quarters repeatedly cites the underpinning of a softer exchange rate. While another ease is very much on the table, if the Fed actually hikes by September, the Bank of Canada will be relieved of the burden to cut again as the loonie weakens. Keeping the Canadian dollar range bound as oil recovers will see the Bank of Canada stay on hold right through the first half of 2016."
The report calls for equities to outperform bonds next year, but be somewhat volatile in the next couple of quarters. "Our top-down leading indicator model, which translates trends in Canadian and U.S. GDP growth, oil prices and other key variables into forward earnings, projects a modest 6 per cent growth rate for year-on-year earnings in the coming four quarters, well below the double-digit consensus," says Mr. Shenfeld.
"That would put the Composite index at a lofty 20 times forward multiple, if you substitute our model's earnings projection for the bottom up consensus. While that's heavily tilted towards huge multiples on energy stocks, the market's path could still see-saw as earnings downgrades for 2015 trade off against economic hopes for the following year.
"Our macro model looks for a heady 18 per cent bounce in calendar 2016 earnings, lifted by improved global growth, firmer prices for oil and lumber, and improved Canadian economic performance. The denominator for discounting future earnings and dividends will be a bit higher, which will eat into the multiple. But as we've seen in the past, that can be more than offset by a bright picture for earnings and dividends growth during a gentle and early stage of a tightening cycle."
The complete CIBC World Markets report is available at: http://research.cibcwm/economic_public/download/fjun15.pdf
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