Global Growth Still Likely to Trail Consensus in 2011-12

TORONTO, June 29, 2011 /CNW/ - A debt-ridden, thriftier consumer, who has been hit by high gasoline prices, will help to make the second quarter of 2011 Canada's weakest since the recession, finds a new report from CIBC World Markets Inc.

The report expects Canadian real GDP to grow by only one per cent this quarter but rebound in the third and fourth quarters to bring growth for the year as a whole to 2.7 per cent. It also calls for global growth to come in at 3.8 per cent in 2011. That's about half a point below the still relatively upbeat estimates from some international bodies like the IMF.

"The train hasn't come completely off the rails, but the global economy has seen some serious braking action in the first half of 2011," says Avery Shenfeld, Chief Economist at CIBC. "We expect generally weak growth readings to roll out in the major developed economies for the next couple of months. Growth in the U.S. second quarter should, nevertheless, be no worse than Q1's 1.9 per cent disappointment."

Mr. Shenfeld notes a downshifting domestic recovery means Canada has even more than usual riding these days on the ability of the U.S. economy to stay out of protracted trouble. He says there are four aggregate measures that are useful for tracking short-run variations in the pulse rate of the U.S. economy, and none is currently flashing red. The first, simplest, and most optimistic, is total hours worked.

"If Americans are putting in more hours at the plant or the office, surely there must be something to show for it," he adds. "In three decades of data, the U.S. has never posted a negative quarter for real GDP without having a decline in total private hours worked. Even if June is flat, private hours will be up at an annualized 3.8 per cent pace."

Another measure is the Philadelphia Federal Reserve Board's ADS index. This combines data on jobless claims, employment, industrial production and other indicators into a weekly revised index of economic activity. "It has been consistently below zero (designed to be its average level) since the start of Q2, indicative of worse-than-average conditions," says Mr. Shenfeld. "But its recent range, holding better than -0.5, is still similar to what we saw in Q3 2010, and above many of the dips during the last two expansions—again suggesting that growth won't be below Q1's pace. A reading of -1 or worse has typically been more consistent with recession onsets."

A third measure is the broader, but less frequently updated National Activity Index from the Chicago Fed. This index needs a three-month average of -0.7 or worse to indicate the onset of a recession. May's three-month average of -0.19 merely indicates that growth is below trend. The fourth measure, the Ceridian-UCLA Pulse of Commerce Index, is a real-time tracking of fuel purchased by trucks using Ceridian's card.

"The theory is that when "stuff" is being moved, it's a sign of economic activity. May's decline was the fourth in five months, which UCLA interprets as consistent with sub-two per cent growth, but not a recession."

Mr. Shenfeld's downgrade of his second quarter forecast for Canada is driven by a downward revision to prior net export data. He notes that exports entered the quarter with less momentum than previously reported and saw a further dip in April tied, in part, to supply disruptions from Japan. Poor weather also delayed some seasonal retail spending that month, a trend that likely extended into a soggy and chilly May. Agriculture was also impacted by excess rain in the Prairies.

But as in the U.S., he is seeing some key data on the ground that provides hope for an improvement in coming months. He notes that private sector hiring has been very robust, and the recent Manpower survey pointed to at least as good a performance in the quarter ahead. That degree of confidence is more consistent with Q2 being a bump in the road rather than the start of something worse. Auto company production schedules point to a 21 per cent rise on the year in Q3 assemblies, suggesting that sector will help to lift the economy in the second half of the year, as supply troubles related to the disaster in Japan ease.

"After a second half bounce, we expect Canada's growth rate to settle back, leading the Bank of Canada to pause for three or four quarters after taking the overnight rate to merely 1.75 per cent in early 2012," adds Mr. Shenfeld. "Government spending will be slowing rather than propping up the economy, with as much as a half-point drag on the economy next year.

"Although a U.S.-style crash is unlikely, housing also won't be doing the same heavy lifting as earlier on in the recovery. Our forecast of 173,000 starts in 2011 implies a reduction of nearly 10 per cent from 2010's cyclical peak. A highly leveraged consumer means that monetary restraint will pack a larger wallop than in the past, limiting the tightening dose that the Bank has to deliver. Along with a desire not to get too far out of sync with a stand-pat Fed, the need to avoid derailing the debt-ridden household sector will keep real overnight rates below zero even with the economy closing the gap to full employment."

Mr. Shenfeld has put off his call for the first Bank of Canada rate hike to October from September, with a delay to December still a possibility.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eijun11b.pdf.

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