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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