Canadian economy to avoid current U.S. recession, finds a new CIBC World Markets report
Boom in energy and commodities boosting economy across the country TORONTO, April 14 /CNW/ - CIBC (CM: TSX; NYSE) - The energy- and resource-rich Canadian economy will not follow the U.S. into a recession, predicts CIBC World Markets in its latest economic forecast. The report finds that record strength in global commodity and energy prices continues in spite of the U.S. slowdown and this has translated into soaring growth in Canadian personal and corporate income. Those gains show up in a very healthy increase in domestic spending and enriched government coffers. The strength of the Canadian economy in 2008 will be reflected in a continuing strong loonie that should hit US$1.05 by year end. "For Canada, the diminished importance of the American economy to global commodity demand has meant downside protection for its resource rents against a U.S. economic downturn," says Jeff Rubin, the Chief Economist and Chief Strategist at CIBC World Markets. "The resource sector still enjoys booming economic conditions, and will continue to do so over the next four quarters, irrespective of the pace or timing of a U.S. recovery." According to Mr. Rubin, the sustained high prices for oil and other commodities has not only benefited Western Canada, but has played a broader role in national growth extending far beyond jobs in the oil patch. The report notes that government revenues have grown from royalty rents and soaring corporate income taxes which have funded a national public sector hiring spree, huge infrastructure spending and fresh tax-cutting initiatives. The report also notes that while every American recession in the last half century has produced at least a material slowdown in Canada, the country's economy doesn't always march in lock-step with its southern neighbour. Canada has seen more moderate slowdowns when the initial shock hit the U.S. economy where it was more vulnerable, as was the case in the OPEC oil recession of 1974, the tech bubble burst in 2001, and now the mortgage crash of 2008. Since there was no comparable disaster in Canada's less-risk-taking mortgage market, the initial shock to GDP here has been entirely external. The report finds that if Canada were an island unto itself, the talk would be about a boom, not a recession risk, given the strength of final domestic demand, and particularly, consumer spending, which was up more than seven per cent annualized in the fourth quarter of 2007. While the bank does not see this torrid pace continuing, it forecasts that solid household income fundamentals combined with further interest rate cuts, should be enough to sustain a three per cent pace to real consumption in 2008, even with a temporary rise in the jobless rate over the summer. "While the U.S. economy has relied on its trade sector to offset a contracting domestic economy, north of the border, the opposite has held," says Mr. Rubin. "The trade sector has acted as a drag on GDP growth in the face of huge, largely resource-driven gains in domestic spending. It is in domestic demand growth, much more than in GDP growth, that the relative strength of the Canadian economy is most apparent against the U.S." He notes that domestic demand growth in Canada likely ran about five and a half per cent year-on-year in the first quarter of 2008 compared to about one and a half per cent in the U.S. Mr. Rubin believes manufacturing in Canada - in particular autos and parts - will continue to be a drag on the Canadian economy. He thinks the sector remains vulnerable to both a U.S. recession and a strong Canadian dollar. These combined forces will hit Ontario the hardest, with its economy likely to come closest of all the provinces to be dragged down into a recession of its own. In response, he expects the Bank of Canada to chop another 75 basis points from the overnight rate taking it as low as 2.75 per cent - although this would still be 150 basis points above the U.S. Federal Reserve Board's target. This rate gap, combined with continued strength in energy and resource prices, should push the Canadian dollar to as high as $1.05 against the U.S. greenback by year end, further increasing the spending power of Canadian consumers. The rise in the Canadian dollar over the last year has largely kept Canadian consumers immune from the significant increases in food and energy prices felt around the globe. In the U.S., all-item inflation is already running at four per cent and growing, a full two per cent higher than in Canada. "While a rising loonie has moderated the increase in largely US-dollar-denominated food and energy prices, the Canadian dollar may be hard pressed to keep pace with further increases coming in food and energy prices," notes Mr. Rubin. He expects Canadians will begin to feel the pain from global food and energy prices in 2009 with the Canadian CPI to average three per cent, the upper end of the Bank of Canada's inflation rate target. While he expects the U.S. economic numbers will continue to deteriorate over the next few months, Mr. Rubin thinks the recession will be short lived. "Stateside, a lot of ammunition is being spent fighting the recession. A plunging federal funds rate, some US$100 billion in reserve lending from the Federal Reserve Board, and a likely Congressional fiscal bailout of some $300 billion in subprime mortgages should power the American economy out of recession by the second half of the year. "In the interim, North American stock markets will have to hold their nose to some ugly non-farm payroll losses and some real, if modest, shrinkage in GDP, just as a rate cutting Fed has to hold its nose to the odour of a four per cent-and-rising CPI rate." The full CIBC World Markets report is available at http://research.cibcwm.com/economic_public/download/fapr08.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.