After a tumultuous end to 2018, economists are forecasting a more stable year ahead—though one with plenty of caveats and more uncertainty heading into 2020.
A number of headwinds that spooked markets in the last quarter of 2018 remain unresolved, including U.S.-China trade tensions, Brexit uncertainty, slowing global growth and risks around the new North American trade deal. But chief economists from Canada’s big six banks, who spoke Wednesday morning at an Economic Club of Canada event in Toronto, still see moderate growth for the year ahead.
“Maybe things aren’t quite as dire as what financial markets were starting to price in,” said Avery Shenfeld, managing director and chief economist at CIBC Capital Markets. Like his fellow panellists, he described a “middling economic picture” for 2019. “No one’s really calling for a boom either,” he said.
Equity markets “climbed into thin air” last year, Shenfeld said, referring to price-to-earnings multiples and expectations for how long the corporate profit boom could be sustained. The good news is those expectations have been marked down for 2019, with expectations of mid-single digit growth for the S&P 500, which he said might be attainable.
Craig Wright, senior vice-president and chief economist at Royal Bank of Canada, said that at this late stage in the business cycle, markets may be looking for bad news—which isn’t hard to find. In addition to trade and Brexit concerns, he pointed to negative third quarters in Germany and Japan. But the real data don’t suggest a 2019 recession, he said.
“On the way up, equity markets seemed a bit disconnected from the economic data,” he said. “You would suspect on the way down, equity markets are a bit disconnected from the economic data.”
The U.S. economy still has momentum driven by consumers, he said, who account for 70% of GDP. With job numbers remaining strong, he expects U.S. consumers—who aren’t saddled with debt the way Canadians are—will lead the economy to 2.4% growth this year.
In Canada, the good news comes from demographics, said Douglas Porter, managing director and chief economist at BMO Financial Group. Canada’s 2018 population growth of 1.4% was the strongest since the 1990s, he said; in raw numbers, the increase of roughly 525,000 was the most since the 1950s.
While Porter said he doesn’t expect to see the same economic “oomph” as the last couple of years, “I think that does put a floor under things like the housing market and auto sales.”
Just as important as population growth is that new Canadians are finding jobs, said Stéfane Marion, strategist and chief economist at National Bank of Canada. He called Canada the OECD’s most successful talent poacher, which bodes well for a knowledge economy whose jobs have a strong multiplier effect.
“Labour markets have done a superb job adapting to globalization, and that’s the story of why we’ve been so resilient over the past decade,” he said.
The flipside is that the greater Toronto, Montreal and Vancouver areas account for 35% of GDP, he said, which is having a negative impact on support for developing Canada’s resource sector.
Porter forecast Canadian growth of 1.75% for 2019 and average inflation just under 2%.
As for domestic political developments, Porter expects a “classic pre-election budget” from Ottawa will be offset by restraint in Queen’s Park with the Progressive Conservative government’s first budget.
Risks
Of course, there are plenty of events that could derail these stable outlooks. Jean-Francois Perrault, senior vice-president and chief economist at Scotiabank, said he expects the U.S.-China trade conflict “to resolve itself in a reasonably sanguine way” before it gets any worse. But he also flagged it as the biggest risk to the global economy. If the trade situation deteriorates, “it kind of throws [forecasts] out the window and you start from scratch.”
As for Brexit, he said there are different takes emerging every couple of days on those negotiations. “We don’t know what the hell’s going to happen,” he said.
The bogeyman lurking in most 2018 forecasts—North American trade agreement negotiations—also hasn’t been entirely overcome, Porter said, despite the USMCA agreed to last year.
“I think there’s a very real concern that it’s going to become a political pawn in the U.S.,” he said, predicting it will ultimately get passed, “but not without some drama.”
Another potential headwind for Canada, Porter said, is the slowdown in housing and consumer spending, “the workhorses of the Canadian economy” during the recovery, which have taken steps backward in recent months.
Beata Caranci, senior vice-president and chief economist at TD Bank Group, is watching business sentiment and the yield curve for signs of trouble. In Europe, business sentiment has dropped in Germany and France, she said, while U.S. sentiment has also come down while still showing some growth.
“We’re a little bit surprised by the deterioration we’ve seen in Europe,” she said.
An inverted yield curve, meanwhile, could provide a shorter lead time than the one or two years’ warning it’s provided in previous recessions, she said. That’s because market participants are more conditioned to interpret and respond to an inverted curve as a recession indicator.
“My gut tells me we’re going to get a shorter lead time this time if it does invert,” she said.
When we look back on Q1 2019, Caranci said, it could be a viewed as a “make-or-break quarter” because of the event risks, which range from trade to Brexit to the U.S. government shutdown.
“There are a lot of political balls up in the air, and if you think the politicians can catch them all, right on to you,” she said. “But I have a bit of skepticism on that front.”
Shenfeld said he wouldn’t be surprised by a replay of recent months to end 2019, as expectations shift again looking ahead.
“By 2020, U.S. fiscal stimulus will have run dry,” he said. With global growth also edging down, a strong start for equities in 2019 may not lead to a great finish, he said.