Canadian Manufacturing

CIBC: 2012 economic growth slowest since recession

Fewer opportunities for exports, decline in domestic demand to blame.

TORONTO—Waning consumer spending and worldwide economic woes are slowing down the Canadian economy in 2012, according to the latest forecast from CIBC World Markets Inc.

CIBC predicts the Canadian economy will expand by 2.1 per cent this year and in 2013 — the slowest growth seen since the recession. In comparison, the global economy is forecast to grow by three per cent in 2012 and 3.6 per cent in 2013.

“The global economy hasn’t fallen off a 2008-style cliff, but it’s been too close to the precipice for investor comfort,” explains Avery Shenfield, chief economist at CIBC.

“There’s a long ‘to do’ list for policy makers that will have to be completed to repair the engines of growth. Some emerging markets are on the boundary of a hard landing, Europe is mired in recession and the US is moseying along on its half-speed recovery.”

And this spells trouble for Canadian exports.

“While a host of indicators continue to signal impressive economic momentum in resource-rich provinces like Alberta and Saskatchewan, we expect a less voracious appetite for commodities in key emerging markets,” says Benjamin Tal, deputy chief economist at CIBC. “The associated pullback in commodity prices could, at the margin, at least, mean less aggressive investment, job creation and ultimately GDP growth for Canada’s most resource-leveraged regions.”

A bump in US auto sales, energy price relief and a lower dollar kept Ontario’s economy afloat in recent quarters but growth will be further stunted if US demand drops off, CIBC’s forecast says.

The increase in US industrial production and vehicle demand boosted factory hiring in Canada, but should the US government cut stimulus funding, the demand from emerging markets will languish. The US could see a five per cent drop in its gross domestic product (GDP) if Congress allows the Bush tax cuts to expire on January 1st and after stimulus funding like the payrolls tax holiday and automatic spending cuts from August’s Budget Control Act expire, the CIBC forecast says.

“That could dent job creation in Canada, as hiring has quickened recently on the bet that external demand will improve. Almost all of the job creation seen in the last six months came from the tradeable sector, namely manufacturing and natural resources that depend heavily on foreign demand,” says Tal.

As well, the low interest rates that kept Canadian consumers spending—and the domestic economy afloat—now have less of a positive impact on the economy and a lower domestic demand for products will also contribute to the economic slowdown.

“Years of free flowing credit in Canada have see Canadians overshoot by a wide margin what could be considered ‘normal’ consumption relative to population trends,” explains Tal. “So after gorging at the table of plenty for several years, Canadian consumer appetites may already be satiated.”

Interest rates on household debt are the lowest in two years, and the positive effect on the economy is beginning to diminish.

“The cooing trend in Canada’s domestically generated demand means that beyond the risk to exports from a US slowdown and the on-again-off-again Eurozone crisis, the Bank of Canada has reasons to stand pat on rates,” Tal explains. “Economic growth in both 2012 and 2013 should fall short of the Bank of Canada’s expectations and it may have to wait for a US-growth-induced pick-up in 2014 until it feels compelled to move from the sidelines.”

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