Canadian Short-term Economic Outlook

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A report put out in March by Arlene Kish of IHS Global Insight suggests the Canadian economy will pick up on the second half of the year, with best performance in the fourth quarter of 2012, and will continue that upward trend into 2013 and 2014 as European countries recover from the sovereign debt crisis.

Kish cites a healthy domestic demand growth, which grew 2.1 per cent in 2011, due to consumer expenditures on durable goods such as furniture and motor vehicles, the latter which continued into the beginning of 2012.

This latest real GDP result was very near the Bank of Canada’s expectations of 2.0 per cent and continues to have a solid footing. But the government sector will be unable to provide support to growth any time soon as the federal government continues to reduce the fiscal deficit, and government fiscal restraint will likely impeded domestic spending which will effect overall real GDP growth.

Business Investment Activity

Business investment is climbing back from the 12 per cent decline in the third quarter of 2011, with the biggest chance coming from a rebound in machinery and equipment and activity in the existing home market.

The Labour Market

Of serious concern for the overall economy is the labour market, which has “deteriorated significantly over the past several months,” with the unemployment rate reaching 7.4 per cent in February, and no job growth so far this year. Government austerity measure taken months ago are starting to show themselves in the numbers, with a net job loss of 19,600 in the broad public sector (including healthcare and education workers), the biggest job loss since July 2011.

Balancing this, however, is a 14,000-job gain in construction and a 6,800 increase in manufacturing positions. “Overall, we believe this slump in employment may be only temporary given the more upbeat economic view that the Bank of Canada provided in the latest policy announcement,” says the report.

Canadian Dollar

IHS predicts the Canadian dollar will remain just above par for a two-year holding pattern, based on plateauing oil prices and steadied interest rate spreads. In February, the Canadian dollar rose to the highest level in over five months against the U.S. dollar as the European Central Bank gave out a record amount of loans to European banks.

“Rate hikes are not expected in the very near term, but they may be coming sooner than previously anticipated,” says the report. “We have pushed a rate hike up from the last quarter of 2013 to the third quarter of 2013. IHS’s main caution regarding a jump in the policy rate sooner is the widening of Canada/US interest rate spreads and a likely increase in the Canadian dollar.” 

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