May 2016

May 27th, 2016

• Thanks to a poor start to the year, the world economy is on track to grow at the slowest pace since 2009.Emerging markets are struggling to adapt to China’s rebalancing act, while advanced economies such as the Eurozone and Japan continue to be hindered by poor demographics. The US economy, often the beacon of hope for the rest of the world, is facing challenges of its own in the form of damaging impacts of a strong dollar and tighter monetary policy at home. Uncertainties about Brexit and China’s ability to successfully manage the transition aren’t helping. For now, we are leaving unchanged our forecast of 3.1% for 2016 world GDP growth.

• The US economy seems to be picking up some speed in the current quarter after a disappointing start to 2016. But old problems remain, namely a trade sector saddled with earlier USD appreciation and weak business investment which is restricting the economy’s potential for growth and jeopardizing employment creation. The latter is likely to pace down further over the coming months while inflation should remain low. So, while the FOMC is trying to convince markets that there will be at least two interest rate hikes this year starting with one this summer, economic realities may force it to adopt a slightly more patient stance. We remain comfortable with our forecast of 1.9% growth for US GDP in 2016.

• Canada’s economy may have contracted in the second quarter. A giveback was always in the cards after unsustainably large gains earlier, but the Alberta wildfires have made things worse for Q2’s prospects. Diminished oil production will hurt GDP in the second quarter, although economic growth should bounce back in the third in synch with clean-up and rebuilding efforts and as oil production recovers. Overall, assuming curtailments to oil production do not last more than a month, the GDP hit to 2016 growth shouldn’t be more than a tenth of a percentage point according to both our own and the Conference Board’s estimates, i.e. a hit that is not significant enough to prompt a dovish turn by the central bank. Until we get more information about the extent of disruptions to output, we are leaving unchanged our forecast of 1.3% for 2016 GDP growth.

Krishen RangasamySenior Economist