A tough economic road for 2012

We know the road is long and winding, but in terms of economic recovery, there are also a few potholes.

That was the message from Towers Watson’s 2012 Economic Expectations presentation, held yesterday at Le Meridien King Edward hotel in Toronto.

The survey gathered the views of economists, strategists, market analysts and investment managers from more than 45 Canadian organizations in the last quarter of 2011.

Market experts say that Canada’s GDP for 2011 is expected to be 2.3% or 2.5%, based on growth to date; for the U.S., it is forecast at 1.8% to 2.0%, said Janet Rabovsky, director of Towers Watson’s investment practice. For 2012, the forecast by survey respondents is GDP of 2% for Canada and 1.8% for the U.S.

Although there is uncertainty in the U.S. economic outlook, Rabovsky said no one is expecting a recession in Canada or its neighbour to the south.

As for interest rates, many of the survey respondents said that there would really be no change over the near term: the Federal Funds rate will remain somewhere between 0% and 0.5%; the Bank of Canada rate, between 0.5% and 1.00%.

In the mid term, Central Bank rates are expected to increase, though not at a rapid pace. According to Rabovsky, there is a bit of variability around the forecasts. The U.S. is forecast at 1% over the mid term and 3% over the long term. In Canada, mid-term rates are forecast at 2.5% and long-term rates at 3.5%.

As for capital markets, “2011 is a year we’d all like to forget,” said Rabovsky. But for 2012, returns are looking a little brighter. With the European crisis still unresolved and concern over the slowing growth in Asia, the majority of U.S. and Canadian investors see equity returns between 6% and 10%, and emerging markets around 10%, she said. EAFE markets are expected to show the biggest acceleration of growth in the mid term through to 2016, but returns will lag market regions.

The top three issues likely to affect the Canadian capital markets in 2012, according to survey respondents, are the European sovereign debt crisis, Canadian and U.S. economic growth and emerging growth in Asia. Respondents were not so concerned about the Canadian dollar.

As for issues raised by pension clients, asset allocation or reallocation, asset-liability matching and underperformance topped respondents’ list as most concerning. Other issues of concern were alternative investments and absolute return strategies.

Areas of Canadian pension investment that are likely going to become more predominant in the next three years are liability-driven investing, absolute return strategies and core plus (for fixed income strategies).