Bankers’ Perspectives Canada’s Financial Experts Look Towards 2013

By Angus Gillespie

The economic doldrums which have taken hold of virtually the entire global economy since the first major slowdown in 2008 are still with us to this day, although as Canadians can be thankful that our financial resiliency has allowed us to keep our heads collectively above water.  A primary reason for Canada being able to withstand much of the negative onslaught has been due to the efficiency of our banking system.  That, however, does not ring true for many other countries, including a number of them in Europe where Germany are being looked upon as the great saviour for those on the verge of consummate collapse.  Recently it was announced that Spain’s problems have largely been stabilized, but other countries such as Portugal, Greece and Italy remain in a precarious financial stance.

On a macro level, economic results in 2012 have been volatile as evidenced by massive swings in investor sentiment followed by periods of calm and improving prospects, but overall the economic news during the first four months of 2012 was mostly positive. Fiscal, structural and monetary policies in Europe were fundamental factors that contributed to a significant improvement in market sentiment, and less constraining financial conditions. Annualized growth rates for industrial production, import demand and capital goods sales returned to positive territory with developing countries spearheading the rebound throughout much of the year.

With the financial system providing a strong stabilizing force for our nation, five of the country’s most noted experts from the banking sector got together for a roundtable discussion at the Toronto Board of Trade to provide their analysis about the current problems and where the international community is likely heading, based on a number of intrinsic factors. The high-profile panel included: Stefane Marion, Chief Economist and Strategist, National Bank of Canada; Douglas Porter, Deputy Chief Economist & Managing Director, BMO Capital Markets; Craig Wright, Senior VP & Chief Economist, RBC; Craig Alexander, Senior VP & Chief Economist, TD Bank Group; and Avery Shenfeld, Chief Economist, CIBC World Markets.

European Union

This is a region of the world that few would have suggested would be the focus of such negative economic turmoil less than a decade ago, at least certainly not to this colossal degree.  While countries such as Germany continue to produce, times have been tough for a number of European Union nations, most notably Greece, Portugal, Spain, Ireland and Italy – all of whom at one point or another have faced massive financial crises, with several of them on the verge of outright collapse and still by no means out of the water. 

“It’s a humbling time to be a forecaster because with the situation in the Eurozone we ended up with things we thought were not possible,” admits Stefane Marion, Chief Economist and Strategist, National Bank of Canada. “Negative interest rates this summer; economic theory tells you that you cannot have negative interest rates so we got we ended up with something we did not forecast.”

The reality for the European Union is that it must now try and solve the main problem it had when the Eurozone was formed, which is a non-optimal monetary union where you are left sharing a single currency without the same politics around the zone.  People look at the United States and latch on to the disappointing economic situation based on the fact it lost about 3 per cent of its output during the recession. Comparatively Spain, Portugal, Italy and Ireland lost between 3 and 8 per cent of their output and they are all still in recession.  Citizens are running scared about the banking sectors in those battered nations. Now the European Central Bank (ECB) is stepping in and is willing to an open-ended commitment to purchase bonds provided that the countries commit to stronger fiscal balances. 

“That’s going to be a big challenge for the likes of Spain with a 25 per cent unemployment rate or 52 per cent for people ages 15 to 24 to endure more austerity,” Marion states.

A big roadblock for some of these countries moving forward is that they have employment to population below 50 per cent. It’s hard to generate a tax base and develop national social programs when less than half of your adult citizens are employed.

“Putting emphasis on productivity is fine for growth but at the same time you can’t just ask these countries to endure even more austerity to promote growth down the road,” Marion notes.

“The ECB is giving the tools to these countries to do restructuring because you can’t restructure if you can’t depreciate your currency and your interest rates move up. It was very important what they (ECB) did. Without this, I think the Eurozone would have disappeared or would have changed within the next six months. That’s how urgent it was to act. Now the reality for the next few months is for the government’s to accept change particularly within the labour markets – increase employment to population ratio. That’s how they will stabilize the tax base and debt to GDP ratio.”

With the ECB setting the stage, the focus is now directly on the politicians and their ability to restructure their economies. It’s going to remain a very fragile environment as the EU aims to stabilize itself as a proper functioning unit. From Canada’s point of view, there will definitely be more of a “wait and see” approach before jumping into any widespread free trade agreements.


Ironically due to weakness within a large part of the Eurozone, Asia has become a bigger aggregate trading partner with Canada over the last 18 months.

Despite the fact Asia has begun to pick up in this regard, it too has had many economic hardships to have to deal with.

“Arguably the slowdown in Asia has been a bigger surprise than what’s unfolded anywhere else in the world and this has been the big disappointment in 2012,” says Douglas Porter, Deputy Chief Economist & Managing Director, BMO Capital Markets.

At the start of 2012 it was known Europe was knee deep in recession and we were looking at a sub par recovery in the U.S. and yet I find the big surprise the degree to which Asia, and China in particular, has slowed.”

The positive news on the one hand is that the S&P has been at its highest level since 2008 and NASDAQ at its highest level since 2000.  It’s been a steady, decent turnaround in the U.S., but at the same time the Chinese equity market has been lurking near its lowest level since mid 2009. Alongside the burden of the European debt crisis has been the possibility of a so-called “hard landing” in China. From Porter’s perspective he believes that risk has grown throughout the calendar year. Even if such a hard landing happened, it’s doubtful the rest of the world would be privy to such classified information from such a secretive state. 

“One good example of that is the fact export growth has basically dropped to nothing in Asia,” Porter says. “Part of that simply reflects the weakness that we’ve seen in Europe. Exports to Europe from China have dropped by 16 per cent this year; to the rest of the world they’re up rather solidly.”

But some of China’s current economic misfortunes come from their own internal state decision making. For the past two years the concern was not the weakness of the growth but it was how fast growth had been and how high inflation had been. Inflation is now under control in China with authorities there now taking their foot off the brakes.

“We also have a once in a decade change in leadership, slated for the middle part of this month and we think that after that point you will see very real stimulus measures unleashed in China,” Porter states. “Our view is that Asia will begin to turn the corner late this year and into 2013.”

For Canada the first question is undoubtedly what does it mean for commodity prices especially in light of the mess in Europe and the slow recovery in the U.S.?

“In a nutshell I’d say the commodities boom is not over but the kind of growth we’ve seen in places over the last 10 years is not going to be repeated over the next 10 years,” Porter opines. “I think we’ll do well to see even modest real gains.”

United States

Canada’s main trading partner still appears to be on course for a slow turnaround, which is leaves the Canadian market anxious to say the least.  The U.S. economy has been struggling for quite a long time. There is no denying that our economic well being is largely determined on what goes on beyond our geographical borders.  The European crisis, the slowdown in the U.S. and the stagnation in developing markets have all had direct effects on our economy. 

“A normal recession recovery cycle is one where your economy shrinks by 2 per cent and then the next year you grow by 4 per cent,” says Craig Alexander, Senior VP & Chief Economist, TD Bank Group. “The U.S. economy has been recovering since mid 2009 and in fact their average rate of economic growth has been hard-pressed to get to 2 per cent so this has been a very weak economic recovery.”

The situation is due in part to the so-called credit bubble and is exactly what balance sheet recessions tell us is going to happen.  The outlook fundamentally depends on what angle you’re look at it from – it’s very much a “glass half full”, “glass half empty” situation, where both could be considered accurate depending on your point of view.

Unemployment is elevated and personal income is rising at a very slow pace. Business investment is rising, but it’s at more of a snail’s pace while exports have slowed because of the situation around the world.  All this has led to an overall decline in consumer confidence with people uncertain as to where America is going.

“From a business point of view some of the concern is on the regulatory front,” Alexander says.  “There’s a lot of uncertainty as to where the nation is going and of course we have a presidential election that’s currently under way. Unfortunately over the last year or so it has been very clear that Washington has been deeply dysfunctional.  Nothing could get done at a time when the U.S. economy desperately needed leadership.”

On the one hand it would be easy to become discouraged about the progress of the American economy but there are positives if you scratch below the surface.

The housing market is showing signs of stabilization. Housing is usually one of the first sectors into a recession and one of the first ones out of a recession.

Looking at corporate balance sheets, the potential for investment is enormously robust; what’s lacking is the confidence to pull the trigger and do so. 

“There’s a lot of pent up demand on the part of U.S. households and pent up demand for investment in the United States so there are signs that the economy is healing,” Alexander replies. “It does look like the Federal Reserve is going to do more to stimulate the economy.”

There is also the much talked about “fiscal cliff”. A large number of tax incentive programs are slated to come to an end this year.  In fact, many economists believe the U.S. fiscal cliff is the single biggest threat to the global economy and its recovery. As of now, the current tally stands at a staggering $1.6 trillion.

“There are automatic spending cuts that will kick in due to the debt ceiling fiasco of last year,” Alexander reveals. He believes a resolution will be at hand but it’s not going to be able to move forward until after the presidential election next month.

Alexander postulates the U.S. economy is likely to plod along at a 2 per cent growth rate for the next two to three years. 

In a release by the U.S. Commerce Department, economic growth was much weaker than previously anticipated in the second quarter as a drought cut into inventories, resulting in an even more sluggish performance against the backdrop of slowing factory activity.

Gross domestic product in the U.S. expanded at a 1.3 per cent annual rate, marking the slowest pace since the third quarter of 2011 and down from last month’s 1.7 percent estimate.

“It’s important to look at where the growth is happening in the U.S.,” says Craig Wright, Senior VP & Chief Economist, RBC. “There are automobiles, equipment, software investment and housing – eventually. Those are three sectors that are important to Canada.”

As of now we’re still about 5 per cent below pre-recession figures, but improvement has been evident.

“We do have strong import numbers such as machine equipment investment and they should eventually show up in productivity,” Wright continues.

Keen Canadian investors wonder how you can make money in a global recession. 

“I think in 2013 we’ll have another rally as investors decide that the world is not great, but that it’s not completely falling apart,” says Avery Shenfeld, Chief Economist, CIBC World Markets. “Within the equities market, because the world is still quite tepid it’s probably not the time yet to throw all your weight behind the most globally, cyclically sensitive stocks. There’s still enough bad news coming out of Asia before the good news next year. You wouldn’t want to have all your money for example in base metals – the things that are most driven to global growth. Equity holdings should still be tilted towards those less cyclical dividend paying stocks.”

What about short-term interest rates and when will the Bank of Canada finally raise rates?

“Back in April, Bank of Canada governor Mark Carney thought that was going to be some time this year,” Shenfeld remarks. “Now he’s sort of conceded, ‘well – it’s like the Leaf fans – wait until next year, we’ll be doing better’ but if the U.S. is held to 2 per cent and Europe is still barely out of recession then I think that Canada might not do much better than 2 per cent either and that’s the kind of growth rate that will see the unemployment rate pretty much stuck where it is and governor Carney in 2013 will be telling us about rate hikes in 2014.” 

On the knowledge the rest of the world is still on hold and the Canadian loonie remains at around par versus the American dollar, there’s really not the latitude to thrust Canadian rates far above those in the U.S. without catapulting our currency sky high and thus creating additional economic strife.