Economic conditions will remain volatile and unpredictable in the decade to come, but as the global economies emerge from the recession, stocks and resource prices are poised for a long-term rally, according to a new report from CIBC World Markets Inc.

The report, co-authored by CIBC chief economist Avery Shenfeld, predicts that consumption will remain lower in Canada and the U.S. as consumers adjust to higher levels of savings and work to reduce debt. But both economies will experience a greater reliance on exports and related capital spending, as levels of consumption in China and many oil-exporting economies begin to rise.

“The composition of both U.S. and global growth has to change,” the report says. “U.S. households will account for less of the North American and global growth pie.”

In fact, Shenfeld believes that the boost in consumption in other regions around the world will more than compensate for any reduction in spending in the U.S., Canada and the rest of the OECD.

“The longer countries like China and India see improving economic conditions, the more households will be confident that their newfound wealth is not ephemeral, allowing them to reduce precautionary savings,” he says.

Greater consumption among these countries will drive up inflation in the decade ahead, particularly in the U.S., where quantitative easing by the U.S. Federal Reserve Board will continue to be more aggressive than in other jurisdictions, the report says.

As inflation sets in, the overinflated U.S. greenback could drop in value by 20%, according to Shenfeld. But such inflation could be beneficial, helping the U.S. reduce its debt burden.

“Letting inflation run at 5% for a few years in the early part of the decade would go a long way to digging the U.S. out of its debt mountain,” the report says. “And higher inflation would help stabilize or even boost nominal house prices, key to allowing a return to positive home equity for those with mortgages that now threaten to exceed the house price.”

Meanwhile, a weaker U.S. dollar will drive up the value of the Canadian dollar, which will likely average a level stronger than parity in the coming decade, the report says. This will dampen import price inflation in Canada.

The report adds that since Canada will not face nearly America’s debt burden, nor its underwater mortgages, letting inflation run above the central bank’s 2% target will be much less tempting.

“Expect an inflation gap to see Treasury yields well above those on Canadian bonds in the first half of the next decade as a result,” the report says.

It notes that inflation will boost commodity prices, which will be advantageous to Canada’s corporate bottom line. Financial services are also likely to thrive in the decade ahead, as companies help Canadians manage a growing pool of savings.

Other notable economic shifts will include deteriorating competitiveness in manufacturing thanks to a higher Canadian dollar, a renewed focus on capital-intensive development of the oil sands, natural gas projects and metal mines, and a drop in housing starts. The Canadian economy will experience a decline in such sectors as automotive equipment, newsprint and forestry, and faster growth in technology and materials, according to the report.

IE