The U.S. federal government bailout will be good for Canada's natural resource industries and boost the Canadian dollar, but provide long-term challenges for the U.S. economy, according to a recent economic forecast by CIBC World Markets.
The report said that the US$700 billion bailout will add to the skyrocketing U.S. federal deficit, which will bring higher taxes, inflation and interest rates in the U.S.
Uncertainty over U.S. financial market stability resulted in oil prices spiking as much as $25 in intraday trading Monday. While oil prices have fallen as details of the U.S. bailout were released today, CIBC said demand in emerging markets will likely push oil prices to $150 a barrel over the second half of 2009.
It added that the resulting per-gallon price of $5 for gasoline will drive U.S. inflation past 6% toward the latter half of 2009 and force the U.S. Federal Reserve to raise interest rates. CIBC projects the U.S. federal funds rate to rise 2% by the end of next year.
High oil prices are expected to buoy the Canadian loonie, which CIBC forecasts will break through parity again sometime next year. The stronger Canadian dollar will further add to the challenges facing Canada's manufacturing and export sectors.