The risk of a return to recession has eased, but Canada is facing relatively weak economic growth this year, according to a new report from BMO Capital Markets.
In its latest North American outlook, BMO says that improved U.S. economic data and some progress in containing the Euro Area debt crisis means that recession risks have eased. In the year ahead, it predicts that the U.S. economy will do a little better than last year, whereas Canada will do a little worse.
“U.S. growth should improve in 2012, supported by low interest rates, pent-up demand and healthy corporate finances. The Fed is unlikely to raise interest rates until well into 2013, if not 2014, especially if unemployment stays high and inflation ebbs,” it says.
It predicts that U.S. growth will improve to 2.2% in 2012 from about 1.7% in 2011, with the second half of the year stronger than the first; and it says that the rate should improve further to 2.6% in 2013, as household deleveraging ends and a full-scale housing recovery begins.
Canada’s economy is expected to grow 2.0% in 2012, down from about 2.3% in 2011. “Elevated debts and a lack of pent-up demand will restrain consumer spending, and government spending should be flat,” it says.
BMO also predicts that the Canadian dollar will weaken toward 94¢ U.S. by mid-year “due to Euro Area jitters”. And, it says that it expects the Bank of Canada to keep interest rates low until early 2013, although it says it could cut rates “if the Euro crisis materially worsens.”
Most of the major risks to its outlook are political. BMO says that one key risk to the 2012 outlook in the U.S. is if Congress fails to extend the payroll tax cut beyond February 29. “In this case, the typical household could face a reduction in annual take-home pay of about $1,000, chopping GDP growth by just under 0.7 percentage points,” it says. Moreover, millions of recipients could lose their extended unemployment benefits on March 1, which could reduce growth by another 0.2 ppts in 2012. “These two ‘shocks’ could slow growth to around 1.5% in 2012, pushing unemployment back above 9%,” it says.
The other key risk to its outlook is Europe’s ongoing debt saga. “While a quick resolution to the crisis is unlikely, it is hoped that European leaders will take further steps to contain the risk of global financial contagion,” it says, adding that more needs to be done to establish fiscal integration and to reform labour markets and pension systems in the peripheral nations.
Another significant risk is that rising geopolitical tensions in Iraq, Iran and elsewhere in the Middle East could drive oil prices sharply higher in 2012, BMO says. “This would undercut U.S. consumer spending and prolong the Euro Area recession.”