Scotia Economics Forecast Update

Fred: Welcome to the Scotiabank “Find the Money” podcasts . I’m Fred Ketchen, Director of Stock Trading for ScotiaMcCleod. These monthly podcasts call on some of Scotiabank’s most knowledgeable experts to help you make the most of your money. Here we’ll discuss strategies designed to put you in the financial driver’s seat. In today’s podcast, I’m joined by Scotiabank’s Chief Economist, Warren Jestin. In this episode we’ll be discussing a variety of economic indicators affecting growth in the U.S., Canada and abroad and what Canadians can expect in the months to come. Stock markets are rallying and the U.S. dollar is firming, sounds like investors may believe that the worst of the U.S. downturn is behind us, Warren, what’s your take?

Warren: Well I think at the beginning of the year, people were expecting that the U.S. economy was going to slide into a fairly significant recession, and the reality is there’s still a lot of support in that economy. The service sector, exports are still doing pretty well but it’s an issue of length of the setback and the length of time that the U.S. will have to recuperate, that’s really the issue. I think as we go into the fall and after the cheques have been spent that are coming back from the government, from the rebates that were given at the beginning of this year, you’re going to find that it’s a very lethargic period for U.S. growth; and, in fact, I wouldn’t be surprised if we would be talking about the disappointing results in the U.S. economy a year from now.

Fred: Well, if you’re right and the U.S. economy then isn’t out of the woods, how deep and long do you expect this setback is going to be?

Warren: Well, we’re at the point of time where you’re probably seeing some of the worst in the housing market. Probably consumer spending is going to slow as we go into the fall; car sales, things like that will be falling off. Employment has already begun to slide in the private sector at least. And, so, as we go through the summer and the fall, I think you’re going to see probably the worst of economic activity continuing through this setback. But when we get into the later part of this year and the recovery period that comes after that, there’s not going to be a lot of lift. The U.S. economy, the U.S. consumer doesn’t have a lot of oomph to get the machine going again; and, I think, as we go forward we may well find that it’s other drivers that will really support the economy. Business investments as it comes back because there’s a lot of infrastructural needs there; it will have to be export sector continuing to drive, because the U.S. consumer is over- levered. And they’re in a point of time right now where borrowing to buy simply doesn’t work.

Fred: Talking about drivers, gasoline prices are going through the roof. Of course, unless you live in Venezuela, I’m told you can buy a liter of gasoline for the equivalent of three cents. But, nevertheless, people around the world are paying more for food, they’re paying more for gasoline, how do you rationalize slower global growth with higher inflation?

Warren: Well the slowdown has been centered in the U.S., and Europe and Japan. Europe and Japan are doing a little better but there is a slow down there. If you look at emerging economies such as China and India and Russia and Brazil and the like, there is still a lot of growth there. And effectively, the demand for commodities is being fueled by these emerging economies. And we’re taking people that simply didn’t consume cars or didn’t need gasoline, or didn’t need nickel, copper, and zinc in the amounts they’re using right now; and putting them into that marketplace. That’s what’s really pushing prices high. And when you look at agriculture we’ve got low carryovers for grain stocks. Very, very tight supplies and all of a sudden, of course, now were producing bio-fuels. So, farmers are not only producing food their producing energy. And that’s really created a tightening in the market and inflation in agricultural products.

Fred: The Federal Reserve indicated at its last rate setting the meeting in May, that it may be ready to sit on its hands for now. Do you share this view and what do you think the Fed will do next? Will they raise rates or will they lower interest rates?

Warren: Well, I think, if the Fed tell us that they’re on hold, they’re probably giving us a good hint as to what’s going to happen in the next few months, and the reason is pretty straight forward. There is commodity inflation, agricultural prices have gone up and they’re a little concerned about that and they know that there’s big tax rebates coming in for the U.S. consumer and that’s going to give a bit of a lift to the third quarter. My sense, however, is there’s not going to be a lot of carry-through. We’re going to be back to a period of under performance in Q4, and, so, I would expect that the next move in the Fed is still down and, in fact, we would see lower rates as we go through the latter part of this year and into next year; followed by another period of pause as the U.S. Federal Reserve waits for the economy finally to get going again.

Fred: How is Canada faring in the challenging global environment? You know, we’ve heard from our politicians, we’ve heard from a number of people that Ontario really is a have-not province, is that true?

Warren: Well, Canada has been performing a whole lot better than the U.S. in many respects. Certainly, manufacturing exports have been hit by the slowdown in the U.S. and the flight of the loony. There’s absolutely no doubt about that. But we have a commodity story going here which is extraordinarily buoyant. Whether its oil or natural gas, uranium, potash, coal, you go right down the list and now its agricultural prices that are driving things along. So that, and the fact that households have better balance sheets. They haven’t levered themselves up and reduced home equities and the fact that our governments have put up a lot of fiscal stimulus in, really makes it feel much more buoyant here than we observed south of the border. The issue of Ontario fits very, very much into this pattern because there’s still a strong consumer, you’re seeing job growth continue, the weakness is in manufacturing exports. So it really depends on where you go across the province. Yes, Ontario is having challenging times. We’re still quite buoyant as a province in Ontario but there is not a whole lot of growth. On a go-forward basis the issue of have-not or have really boils down to where the growth prospects are brightest. And I see commodity prices staying strong for a long time. B.C., Alberta, Saskatchewan, Newfoundland resource provinces leading the pack and Ontario with big challenges in manufacturing in the slow lane. So, it’s really a change in relative performance.

Fred: Okay, so given that kind of an outlook has your bullish view for the Canadian dollar changed?

Warren: Well for a long time now, we’ve been expecting the Canadian dollar to trend higher. It’s very volatile, last year we were as low as, well we were below 85 cents at one point in time and we were as high as a $1.08. So, one thing that is virtually assured as were going to still have a lot of volatility. But looking through that, I am still positive on the currency, in the sense that it’ll probably rise, simply because we are a commodity rich country in a commodity short world. We have fiscal surpluses, we have trade surpluses, we have a monetary policy that is more cautious than south of the border. All of these things tend to support our currency at a time when global investors are worried about the U.S. They’re worried about heavy overweight positions in U.S. dollar assets and if they have their druthers, they’d like to reduce that weight and that would cause the U.S. dollar to fall.

Fred: Well, whether you are the consumer or if you are an investor, which sectors do you think should benefit from these emerging trends that you’re indicating?

Warren: Well, on a long term basis, if you believe our story that commodity prices are going to remain pretty high, than segments of the economy that are oriented around the resource sector, I think have a fairly bright future. There’s also another factor coming into play, however, and that is the world is going “green”. We’re having environmental remediation moving up to the top of the policy agenda. I believe that industries associated with environmental remediation will be the fastest growing industries in the world in the next twenty-five years. So, whether it’s associated with wind-power or solar or building transmission lines for electricity, I think it’s going to be a very, very solid performance. Another one I would mention and I feel this every day we’re all getting older. The Canadian economy is getting older; the world economy is getting older. So industries that are oriented towards the changing demographic, towards servicing people that have different tastes over time; more mature tastes, I would like to say, are ones that are going to do very well.

Fred: Well, thank you, Warren for sharing your forecast with us. We hope that this discussion has helped you better understand those issues affecting the economy of our neighbors to the south and their impact on us here in Canada.

I’m Fred Ketchen. Join us next time when we’ll be focusing our discussion on small business owners in Canada and the things that they need to consider when it comes to growing their business. And for more information, please drop by your Scotiabank branch; we’d love to have the opportunity to talk with you.