Originally from our sister publication, Advisor.ca.
With barely three days to go—two if you’re in Australia—before 2011 is consigned to the dustbin of history, investment experts the world over are furiously fashioning forecasts.
Keeping one eye trained on the road ahead and the other on the rear view mirror, Doug Porter, deputy chief economist, BMO, offers some interesting 2011 facts and 2012 predictions.
2011 Facts
Canada grew faster than Brazil. Despite challenges both in Canada and globally, the Canadian economy likely grew 2.3%, close to expectations and not far from its long-run average. Over the latest four quarters, GDP is up 2.4% year-over-year, outpacing not just most major industrialized economies (the U.S. was up 1.5% and the Eurozone 1.4%), but even the 2.1% advance in emerging-market darling Brazil over the same period.
The CAD was the weakest currency among G10. Global investors were not so impressed with the Canadian dollar in 2011, driving the currency down more than 2% on the year. So, not only did the loonie weaken against the U.S. dollar and the disaster-hit Japanese yen—the strongest major currency this year—but also against the beleaguered euro.
The U.S. government faced its lowest borrowing costs since 1950s. Despite political difficulties throughout the year, the credit-rating downgrade of U.S. government debt, the intense focus on deficits and debt, and 3%-plus inflation, 10-year Treasury yields averaged less than 2.8% in 2011 and ended the year close to all-time lows around 2%.
Gold was the top-performing commodity in 2011. Despite record gold, silver and copper prices this year, and the early-year sprint in oil above $100, commodity prices sagged overall in 2011. The Commodity Research Bureau Index fell more than 8%, with natural gas, nickel and lumber all down more than 20%. Accordingly, the materials sector was the second weakest in the TSX this year, “topped” only by tech, with even gold stocks down more than 15%.
Canadian inflation rose at its fastest pace in 20 years. The consumer price index will rise by almost 3% this year, the fastest annual increase since 1991, the year of the GST and the year the Bank of Canada began targeting inflation. This year’s increase was pumped by sales-tax increases, but even ex-tax inflation was nearly 2.5%, despite a soggy economy and a lingering output gap.
2012 Predictions
The North American economy will decouple from European recession. There are two distinct calls here: European GDP will contract roughly 1% in 2012, after growing 1.5% in 2011, and North America will partly avoid the downdraft. The most encouraging development in recent months is the ability of the U.S. economy to gather modest momentum in the face of Europe’s deepening woes. However, we continue to look for sub-par 2% growth in both Canada and the U.S. next year, keeping jobless rates little changed. The U.S. economy should grow faster than Canada for the first time in seven years.
Housing will add to U.S. growth in 2012. After declining relentlessly for six consecutive years, and dropping to a record low of barely a 2% share of GDP, residential construction is finally poised to add, albeit slightly, to U.S. growth next year.
Homebuilder sentiment is slowly improving, home sales are creeping off the bottom, and rising rents are spurring construction of multiple-unit buildings. In a related development, consumer spending should grow faster in the U.S. than in Canada for the second year in a row. With U.S. job growth finally catching up to Canada, and plenty of pent-up demand, there is simply more runway for U.S. consumers.
The BoC will have its longest period of inactivity since the 1950s. Given the sluggish external growth backdrop and a tapped-out domestic consumer, as well as a Fed that seems poised to lower interest rates in the next 18 months, we see the Bank of Canada (BoC) on hold through 2012. In fact, there is more chance of a BoC rate cut than a hike in the next year. But note that the Bank was the only G10 central bank that did not take any easing steps in 2011. If the Bank does stand aside, that would leave rates on hold for at least 28 months, the longest stretch of stable Canadian interest rates since the early 1950s.
China’s trade surplus will narrow markedly. With inflation pressures finally cracking, and growth prospects in the rest of the world sagging, China’s policymakers took initial steps to ease monetary policy in late 2011. There should be more aggressive easing next year, which, combined with a 5% appreciation of the yuan in the past year and weaker demand from Europe, should help cut into the trade surplus next year.
Vancouver will not be the hottest housing market in Canada in 2012. Despite the intense focus on the city as a bubble candidate as far back as 2010, Vancouver still saw the biggest average price increases (+16%) and the biggest real-estate volume gains (sales and price gains combined) in Canada this year. That won’t be repeated next year. There are already clear signs that sales are dipping, and price increases are starting to ebb. Toronto has seized the mantle of hottest major market in recent months, and appears to be at risk of overheating. Meantime, the award for most well-behaved market is a tie between Calgary and Edmonton, both of which have seen stable prices in recent years—even as Alberta recorded the strongest employment growth in the country in 2011. Assuming oil prices hold around $90 or better, look for those two cities to be the hottest housing markets in 2012.