(January 3 – 09:30 ET) – CIBC is out holding the hands of nervous investors and consumers, downplaying the possibility of recession.

“While it is possible to conjure up any number of scare stories, the U.S. and Canadian economies are unlikely to experience a recession in 2001,” says CIBC’s chief economist Josh Mendelsohn. “Although much slower than in 2000, the next two years are expected to show what is still very respectable growth of 3% or more in both Canada and the U.S.”

“This is not to dismiss out of hand the possibility of a hard landing. However, it is our view that, with the right policy actions, a hard landing can be avoided.”

CIBC says that its call against a hard landing is based on the following assumptions:

  • the U.S. Federal Reserve Board will start to reduce interest rates early in 2001;
  • the U.S. dollar does not fall sharply;
  • there is no sharp increase in risk aversion in financial markets which creates a “credit crunch”;
  • there are no new, dramatic spikes in energy prices.

“Under these assumptions, we expect U.S. growth to fall to 3% in 2001 before rebounding to 3.6% in 2002,” Mendelsohn said. “Canada will be buffeted by the downturn in the U.S., but will still expand by 3.3% in 2001, with 2002 showing growth of 3.9%.”

Mendelsohn noted that the Fed looks likely to cut interest rates. He also noted that the new Bush Administration could get some tax cuts through the U.S. Congress in 2001.

As well, energy prices are likely to ease in the first half of 2001 and the global economy is in reasonably good health, apart from Japan.

There are positive signs in Canada, too. “Tax cuts at both the federal and provincial levels will give consumers additional spending power,” said Alister Smith, deputy chief economist.

“Further stimulus will come from an anticipated reduction of 50 basis points next year in Canadian interest rates, somewhat less than our forecast of a 75 basis points reduction in U.S. rates. Moreover, as a net energy exporter, the Canadian economy does not face the same drag on growth as the U.S. from high energy prices.”

“While there are some real challenges ahead, a U.S., and Canadian, soft landing still seems to us to be the most probable outcome,” Mendelsohn said.
-IE Staff