2011 Economic Forecast

I don't place much faith in economic forecasts, save one - the outlook of management of the company I own stock in.  They are holding the order book, so if they think it is going to be a good year, then that helps me to have confidence in their numbers.  Good management rarely surprises on their numbers. 

Having said all that, I recently attended a venue in which Craig Alexander, the Senior VP and Chief Economist at TD Bank gave us his view of the state of the economy.  He emphasised at different times the continuing volatility in the markets.  As if on cue, Egypt is making the news and having an affect on markets, especially the price of oil.  Here are some of the highlights. 

The global economy is, currently, a two-speed economy.  Despite our interconnectedness, the developing economies are experiencing fast growth, while the developed economies are experiencing slow growth.

Inflation is growing in China, not so much in the Western World.

A slowing in China's economy would be favourable; a hard landing would not be.

China has the ability to reverse the course of its economy.

We are at an inflection point today where the so-called developing economies are surpassing the so-called developed economies.

In Europe, real problems existed before the financial crisis, which were made worse.

The European bailout fund is not large enough to cover all possible defaults.

One method to fight recession is the devaluing of the currency; Europe lacks this ability

The normal recession is caused by high inflation and high interest rates.  The following contraction causes rates to fall and growth to resume.  This time IS different (to the normal recession).

Compared to other financial crises, the U.S. situation is on track, with recovery taking 7 quarters (the one we are in now).

The total (as opposed to reported) inventory of houses in the U.S. market is currently 19 months.

In Canada, the main loss of jobs was in manufacturing; the recovery in services, and government.

Canadian housing market is NOT in a bubble, simply a response to supply and demand.

While Canadian household debt is high, a lot of it can be attributed to the large number of first-time home buyers recently entering the Canadian housing market.

So, what does that mean?

Braking in China.

Continued volatility, especially in Europe.

One and a half percent growth in Europe.  Boom in northern Europe, including Germany.

Default on debt by a European country is still likely.

No double dip, and no depression.

Recovery in the U.S. housing market will take 4 or 5 years.

Three to three and a half percent growth in the U.S. economy.

U.S. employment will rise slowly, as will inflation.

U.S. interest rates likely to rise in second half of 2012.

Canadian growth of two and a half percent.

Canadian exports to the U.S. could take 10 years to get back to "normal".

Slight drop in Canadian housing market.

Strong business investment.

Bank of Canada interest rate hike in July, 2011.

All of this would suggest cash and cash equivalents will return less than the rate of inflation.  Good corporate bonds at the shorter durations are most favoured in this environment.  Growth in U.S. equities is expected to be in the high single digits, with low double-digit growth in Canadian equities.  Most of all, continued high volatility in the financial markets.