Growth in the global economy remains slow and the benefit of lower oil prices, and additional monetary stimulus have yet to materialize and provide a meaningful lift. This slow growth phase will keep commodity prices down, inflation low and interest rates at very stimulative settings.
The U.S. economy will come out of its first-quarter dip and gain growth momentum in the rest of the year. Temporary factors hitting first-quarter growth to below zero will give way to positive fundamentals of pent-up consumer demand, stimulative monetary conditions, less fiscal drag and business investment opportunities. The higher U.S. dollar and lower oil prices negatively affecting exports and oil exploration and development are constraining forces. Overall, growth will fall in the 2.5% to 3% range this year and closer to 3% in 2016. The U.S. Federal Reserve System will initiate its first rate increase since the recession later this year.
China’s economy is not showing signs of accelerating out of its slower growth phase. Additional monetary and fiscal stimulus is being administered, with more in the offing, but it takes time for these measures to affect the real economy. China’s slowdown is hurting trade with other countries and commodity prices. The recent run-up in oil prices due to a weaker U.S. dollar and some sector-specific optimism is reversing. Geopolitical factors remain a large risk in future oil prices, but the U.S. dollar will rise and stay higher when U.S. interest rates normalize.
As anticipated, the first-quarter gross domestic product report for Canada was weak, but more important is the outlook for the rest of 2015. The Bank of Canada sees a substantial rebound reaching 2.8% annualized growth in the third quarter and holding at 2.5% into 2016. This is higher than the gain predicted by all but one private-sector forecaster, and it will come about only if exports, particularly manufacturing and business investment, rise substantially. Thus far, the jury is still out.
This forecast sees Canada at less than 2% real GDP growth in 2015, and growth edging up to just above 2% in 2016.
No change to the bank’s policy rate occurs this year, and this forecast has no change well into 2016. There is a low probability of a rate cut – and only if the global economy suffers a setback.
The bank’s move to rate normalization will be gradual and measured. The yield curve will begin to steepen in the next two years and beyond when improving growth expectations are more entrenched in the market. •
Helmut Pastrick is Central 1 Credit Union’s chief economist.
