Which direction will stocks and bonds go this year? How will the drop in oil prices affect the economy?
Seven economists gave their forecasts on the global economy, markets, currencies and more at an Economic Club of Canada panel discussion in Toronto on Tuesday. Here are a few of the things they had to say.
Warren Jestin, senior vice-president and chief economist, Scotiabank
A few years ago, the story was that Canada was special. It was performing better than the U.S., and there was worry for a variety of reasons: it still hadn’t recovered in terms of jobs from the vicious recession. Europe was on the cusp of recovery, and Asia was a powerhouse.
“In the intervening period, of course, everything seems to have changed,” Jestin said. “The U.S. now is the darling of investors globally, the economy is performing better at a time when many economies are performing in a less vigorous way. Canada is still special in many ways, but we are lagging the U.S. in terms of overall performance.”
Europe’s economy, which, two years ago, seemed to be on the road to recovery, now looks very problematic. In Asia, China’s growth may fall below 7%. The story within Asia is uneven, with India and South Korea poised to do well.
The outlook for commodities, the focus on the U.S., the unevenness in the international realm all point to a Canadian dollar that has more risk on the downside, he said.
Read: A tactically cautious year ahead
Douglas Porter, managing director and chief economist, BMO Financial Group
There are two massive external forces at play this year that will affect Canada’s economy: oil prices and the U.S. economy, Porter explained.
He noted that lower oil prices are a net negative for Canada as both the oil and gas and mining sectors account for a large amount of business capital spending.
But the good news is the U.S. economy is bouncing back and could grow by more than 3% growth this year. As a result, Canadian exports should rise.
He believes the Canadian economy will slow down slightly. “After posting growth of 2.4% last year, we’re looking at about 2.2% with some downside risk based on where oil prices settle out at,” Porter said.
The decline in oil prices leaves the Bank of Canada more room to stand on the sidelines. It does cut into real GDP growth but also skewers inflation, which should average about 1% this year after about a 2% increase in 2014.
“In that environment, we think the earliest the Bank of Canada will raise interest rates is in October of this year,” he predicted.
Craig Wright, senior vice-president and chief economist, RBC
The U.S. economy isn’t particularly sensitive to external events and doesn’t tend to suffer as much as other countries’ economies to geopolitical or economic risks, Wright said.
“We’ve seen fairly stable employment growth,” he explained. “We’ve seen continued improvement in consumer confidence.”
The drop in oil prices will also benefit their economy as it’s like a tax cut for consumers. Wright said the consumer is the engine of the U.S. economy, and that trend is expected to continue.
He predicted the U.S. economy will grow at a rate of 3.3% or more.
Read: Global economic growth to remain fragile: Report
Paul Mortimer-Lee, chief economist, North America, BNP Paribas
The European economy is still expanding but at a slower rate, noted Mortimer-Lee.
He noted that there are some bright spots, such as Spain and Ireland. However, Greece has elections coming up this year and a new government could request changes to its bailout.
Mortimer-Lee said some countries could take measures to help the European economy.
“One of the big problems is Germany. Germany has a massive current account surplus,” he said, noting the country has a balanced budget and could help stimulate the economy. “Germany needs to do much more.”
Mortimer-Lee predicts the European Central Bank will begin quantitative easing later this year to help deal with the region’s lack of inflation.
Avery Shenfeld, managing director and chief economist, CIBC World Markets
The U.S. Federal Reserve will surprise markets by hiking rates earlier, no later than June, but April may be a possibility given the growth and improvement in employment, Shenfeld predicted.
“If oil manages to recover in the second half of the year, maybe we’ll have one-quarter point hike from the Bank of Canada before the end of the year,” he said. But if the economy grows less than 2%, Shenfeld doesn’t expect a hike in rates until 2016.
If the U.S. does raise interest rates, 10-year Treasuries could hit 3% at some point in 2015. Canadian yields are a bit more tied to the U.S., but he doesn’t expect 10-year bonds to yield more than 2.5%.
Most equity markets will likely produce single-digit returns, Shenfeld said, adding that many S&P 500 companies export to foreign markets or have subsidiaries in foreign markets and are going to be hit by adverse currency effects, which could put a bit of a lid on earnings growth.
Canadian equities have already taken a hit because so much exposure to the resource space. He said there’s less upside for Canadian banks compared to U.S. banks, and investors will lean toward equities that benefit from strong U.S. consumer spending in the first half of the year.
Shenfeld predicts it will be a tough year for investors and “where you’re going to have to be quite nimble, but a year which I still think that overall equities are likely to outperform bonds in terms of total return for the year.”
Read: Investment professionals predict meagre growth in 2015
Stéfane Marion, chief economist and strategist, National Bank of Canada
The drop in oil prices could negatively affect a number of countries’ economies, Marion said.
“With $60 oil prices, a number of countries will not balance their budgets,” he noted, adding that it could lead to social unrest.
However, Marion said global oil consumption is about 93 million barrels a day, which is a new all-time high.
He predicted that oil prices could go back to $60 in the first half of 2015 and maybe reach $70 later in the year.
Craig Alexander, senior vice-president and chief economist, TD Bank Financial Group
The global economy is still in a slow growth, low inflation, low-rate environment, Alexander said, noting that the U.S. is the bright spot and “Canada will benefit from a stronger U.S. economy.”
Canada will experience moderate economic growth of about 2%, he said. If oil keeps going down, growth will be less than 2%. If oil comes back up a bit, then Alexander thinks growth should be above 2%.
But looking at the rest of the world, he said the picture is not as bright and emerging market economies are no longer delivering the strength they were before.
Brazil, Russia, India, China and South Africa were once the golden children, Alexander said, noting that they’re the problem children today.
There’s been a fundamental change in the ability of emerging markets to drive global growth. “They’re going to contribute but not in the way they did in the past,” he said.