Canadian economy better off in 2014, but it’s no home run

Firmer global growth depends on central banks keeping interest rates steady in 2014, notes a CIBC World Markets report.

TORONTO – Rising equity prices are signaling better times ahead for investors but firmer global growth will depend on central banks keeping interest rates steady in 2014, notes a new report from CIBC World Markets Inc.

“Equity markets are sensing it, and this time, they’re right. Global growth should finally surprise on the high side in 2014,” says Avery Shenfeld, Chief Economist at CIBC. “A year of 4% global growth is hardly spectacular, but will be a point faster than 2013, and a half-point above the last IMF forecast.

“Typically, upside surprises in growth bring higher bond yields. But the causation also goes the other way: at a still-fragile point in the cycle, easy monetary policy is a necessary condition for growth to accelerate. Central bankers in North America, Europe and Japan, each in their own way, are going to ask markets to give low rates a chance.”

Amid a rising tide of global growth, Canada will be “waiting for a helping hand from abroad” to push its economy forward in 2014, say Deputy Chief Economist Benjamin Tal and Senior Economist Emanuella Enenajor. “Business spending and exports should accelerate, but with consumer spending, homebuilding and government outlays all set to underwhelm, growth of 2.3% in 2014 will trail the US pace.”

Fortunately for investors, stronger global growth is giving the Canadian equity market more room to run.

“Our top-down model points to a 12% gain in corporate earnings for 2014,” says Shenfeld. “Within the equity market, what hasn’t played well in the past few years should now outperform.”

That includes equities tied to global growth such as base metals and energy stocks.

CIBC’s 2014 forecast for the Canadian dollar sees it bottoming at US$0.91 in the first quarter but strengthening to just five cents weaker than the US dollar by year end as global growth helps improve the country’s trade balance. Shenfeld says early-year weakness for the loonie will be due in part to the latest policy statement from the Bank of Canada which encourages speculation of a rate cut.  Shenfeld calls this a “phantom rate cut, one spoken about but never seen,” which can boost economic output through the exchange rate while keeping household borrowing in check.

Shenfeld expects that the Bank of Canada will hold off hiking interest rates until early 2015.

“Higher-than-historical levels of household debt imply a much slower trajectory back to ‘normalcy’ for interest rates. Don’t be surprised if after taking rates to merely 1.75% in 2015, we then see a pause at that level to allow the central bank time to gauge the economic response.”

In the US, “2014-15 could finally see a real recovery take shape,” say senior economist Peter Buchanan and economist Andrew Grantham. Substantially lighter government belt-tightening combined with a “housing recovery in progress and the shale revolution boosting US energy and related manufacturing,” should see the economy achieve 3% growth in each of the next two years.

“Consumers will likely spend some of that newfound wealth on furnishing new apartments and houses. Even after leveling off with higher mortgage rates in mid-2013, housing starts, home sales and prices remain on broadly upward trends. And so far that has come with little help from a key demographic—young people,” say Buchanan.

Tame inflation should see the US Federal Reserve keeping rates near zero until 2015, the report notes.

After a challenging few years, the global economy is finally showing signs of moving out of the slow lane,” note Buchanan and Grantham. “[Changes] on the fiscal side and recent better-looking data suggest the global economy is finally poised to move back onto firmer terrain. Growth rates of 4% in 2014 and 4.2% the year after would represent the best back-to-back increases in nearly a decade.”

The rising tide of growth should go a long way to restoring export momentum in emerging markets, they say. China and India are already showing improvement and “should continue to contribute disproportionately to global growth and resource demand.” CIBC is forecasting growth of 8 and 5.3% for China and India respectively in 2014.

Meanwhile, in the Eurozone, “fiscal policy should be another catalyst for faster-paced growth,” say Mr. Buchanan and Mr. Grantham. “With countries missing deficit targets no longer being forced to make up the shortfall immediately, fiscal drag will likely be much lower.” CIBC is forecasting 1.4 per cent growth in the Eurozone growth in 2014.

Download the complete CIBC World Markets report here.