Wall Street rescue will hit Main Street USA with higher inflation and interest rates: CIBC World Markets
Canada's commodity- and energy-leveraged economy to benefit TORONTO, Sept. 23 /CNW/ - CIBC (CM: TSX; NYSE) - The $700 billion rescue of Wall Street by the U.S. government will help avert a meltdown in the world's financial system but cost Americans down the road in the form of higher inflation and higher interest rates, finds a new economic forecast from CIBC World Markets. "While the cost of taking another path will never be known, the cost of the one chosen is clear enough," says Jeff Rubin, chief economist and chief strategist at CIBC World Markets. "Higher deficits can only bring higher taxes and higher inflation can only bring higher interest rates. Both are on their way in the American economy." Mr. Rubin, speaking today at the CIBC World Markets Eastern Institutional Investors Conference in Montreal told his audience that while the U.S. and rest of the OECD are likely to see growth grind to a halt by year-end, global growth should regain momentum in 2009. And while it will fall short of the near-record pace of the last few years, it will put pressure again on commodity and resource prices. "With fears of a financial system meltdown and growth collapse averted, prices for a range of commodities have already likely seen their lows," says Mr. Rubin, who expects global growth to settle at a respectable 3.8 per cent this year and 4.2 per cent in 2009. That pace should quickly push up commodity prices, including oil, which he expects will average at a record-high $150 per barrel over the second half of 2009 as the economic recovery rekindles demand growth. The result will see U.S. CPI inflation punch through six per cent in the latter half of 2009. The last time CPI inflation was that high was in 1990 when the federal funds rate was 7.5 per cent or almost four times what it is today. The good news for the U.S., says Mr. Rubin, is that the gradual easing of mortgage and credit pressures will help stabilize the housing and labour markets by the second quarter of 2009. Mr. Rubin expects that the U.S. Federal Reserve will only be tolerant of inflation until the economic picture brightens. By the second quarter of next year it will begin raising interest rates. "Once started however, they have a long way to go. By year-end they will have hiked the funds rate by 200 basis points, in what is likely to be a protracted and painful adjustment in real interest rates." Mr. Rubin told his Montreal audience that the 2009 picture will be brighter in Canada. "For the commodity- and particularly energy-leveraged Canadian economy, the U.S. Treasury bailout is unambiguously good news. After all, it won't be Canadian taxpayers that are on the hook, while it will be Canadian resource and energy companies that will benefit from the stability brought to financial markets and the more bullish outlook that shines on world growth. "The TSX is likely to take a run up to 14,000 before feeling the bite of interest rate hikes later next year. Not having cut rates as much as the Federal Reserve Board, the Bank of Canada will find itself in the enviable position of not having to raise them as much on the way up. The Bank is likely to do no more than half the Fed's 200-point rise while the loonie breaks through parity again on the back of climbing crude prices," says Mr. Rubin. He adds that while Canadian growth will likely stumble during the second half of this year, rising energy prices next year will once again add momentum to both corporate profit growth and income gains throughout the resource-levered Canadian economy. Real output should also grow at a three per cent pace by the second half of 2009, halting the rise in the national jobless rate, which is likely to peak at just over 6.5 per cent. But he says inflation, stoked by the same energy price pressures felt south of the border, will likely re-ignite, suggesting the Bank of Canada's work, like that of the Federal Reserve Board, may not yet be done. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/fsep08.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.