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Canada to outperform G-7 peers next year - but growth likely to be sub-par until 2011: CIBC
Healthy domestic economy, but exports stall again after strong 2009 finishTORONTO, Sept. 11 /CNW/ - CIBC (CM: TSX; NYSE) - Canada will lead all industrialized nations in economic growth next year, but real GDP will only climb two per cent, making the march back to full employment a long one, finds a new economic outlook report from CIBC World Markets Inc. The report notes that while that growth will be boosted by government stimulus spending, the secret behind Canada's projected outperformance in 2010 is the relative resiliency of the country's household sector. A more solid banking system and mortgage market lessened the blow of the global financial shock relative to what was seen elsewhere. That left Canadians in a better position to take advantage of basement bargain interest rates offered by the Bank of Canada, making Canadian monetary policy extremely effective - and setting the stage for a stronger rebound in 2011 when global growth improves. "Canadians can count their blessings, from a sounder financial system, a federal government that can afford to run deficits after years of fiscal rectitude, and a household sector that, while facing sharply increased bankruptcies, has been less beaten up on housing and job prospects," says Avery Shenfeld, Chief Economist. But with export gains likely to fade again after a brisk end to 2009, the coming year's growth will still be sub-par by historical standards. "Through a half speed, two per cent recovery in 2010, Canadian economy watchers will, like Toronto Maple Leafs fans, have to console themselves by saying "wait until next year." Canada's two per cent growth in 2010 will be half a percentage point stronger than the projected growth for the U.S., and more than double the growth that most Eurozone economies will see. The report calls for Canada's real GDP to jump into gear in 2011 and grow by 3.8 per cent. "By keeping monetary and fiscal policy stimulative in the coming year, we should be setting the stage for a more robust upswing in 2011," adds Mr. Shenfeld. "By then, U.S. consumers may have achieved the desired rise in the savings rate and will be willing to match income growth with spending. A year of modest job growth will add to that confidence. And Canadian capital spending will be turning in the lagged response to profit gains." While Canada will see a stronger economic rebound than its G-7 counterparts, growth here, as in the rest of the world, is the result of unprecedented stimulus that has brought the global economy back from the brink of depression. Ottawa's injection of almost $40 billion will amount to about 2.5 per cent of Canada's GDP. While more than half of the stimulus money has been allocated to 2009, the bulk of the stimulus cash is set to be spent in 2010. The report states that with the maximum economic impact of the stimulus being felt next year, nearly 55 per cent of the expansion in output over the third quarter of 2009 to fourth quarter of 2010 period will be attributed to government. That compares with the meagre six per cent average contribution by government in the recoveries of 1983/84 and 1991/92. The roughly tenfold difference is attributable not only to the massive size of the stimulus, but also to the lessened role to be played by trade and business investment, sectors that are traditionally net contributors to growth in the recovery period. "Fortunately, in the battle to get out of recession, policymakers seem unlikely to make the mistake of landing on an aircraft carrier and declaring "mission accomplished" too soon," adds Mr. Shenfeld. "The Bank of Canada has pledged to stand pat on rates for several more quarters even if its consensus-topping growth outlook is on the mark. Its U.K. counterpart surprised markets by adding to quantitative easing even amidst early signs of an economic warming. The Fed and the Obama administration both seem to recognize the fragility of the nascent expansion and are in no hurry to tighten." Mr. Shenfeld also notes that sometime beyond 2010, the global economy will have to absorb the impact of eventual fiscal policy tightening. Here again he finds Canada in a stronger position than many of our G-7 counterparts. "Even under the now more pessimistic outlook from the Finance Minister, the erosion in Canada's federal debt to GDP ratio is nothing like the debt wall hit in the early 1990s, and miles below what could end up being an 80 per cent debt to GDP ratio for the U.S." While Canada's household sector will give a lift to the economy next year, after a strong bounce in the last half of 2009, our export sector will again be a net drag on GDP growth. Protectionism, a strong Canadian dollar, and the nature of the recovery in the U.S. will prevent Canadian exporters from fully capitalizing on American growth in 2010. The report finds that American consumers, which have, in the past, been the main engine of U.S. growth and Canadian exports, will be taking a backseat to government spending in the initial stages of the recovery. But what is spent by the U.S. government will have minimal impact on Canadian exports. The report estimates that American industries benefiting from the stimulus typically import only 1.7 per cent of their inputs from Canada, compared to the 2.3 per cent overall Canadian share in U.S. GDP inputs. Buy America provisions will also shut the door on some Canadian bidders, as will the competitive challenges of a strong Canadian dollar. Joining trade in the 2010 ugly parade will be business capital investment, which will also be a drag on growth. Since reaching the cycle peak in the final quarter of 2007, real fixed business investment hasn't dropped as fast as real corporate profits. The gap between the two is now the largest since the early 1990's recession. A leveling off in commodities and the pinch on exports from a strong Canadian dollar will delay a rapid recovery in profits until 2011. That, coupled with considerable excess capacity, will curtail growth in capital budgets in the coming year. "On some dimensions, Canada stands out from its peers, largely because the financial shock to the household, government and banking sectors was less dramatic than in the U.S. or some parts of Europe," notes Mr. Shenfeld. "But as we saw last year, no country is an island, and after a decent finish to 2009, Canada could be waiting another year for truly robust growth." The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/fsep09.pdf. 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For further information:
For further information: Avery Shenfeld, Chief Economist, CIBC World Markets Inc. at (416) 594-7356, avery.shenfeld@cibc.ca; or Kevin Dove, Communications and Public Affairs at (416) 980-8835, kevin.dove@cibc.ca