Predictions & Projections

Last year, I predicted that Canada’s 2010 GDP growth would be around 3.2% (although the final tally is not in yet, the number appears to be around 3.0%), so I was too optimistic.  My forecast was tempered by the reversal in housing; 2009 saw an over-stimulated housing market, and that sector retrenched in 2010 (creating a drag on GDP).  Of course, I never saw the weakness of the U.S. recovery as a critical factor.

The BoC 2011 GDP forecast is for growth of 2.5% because the Bank sees a many potential headwinds.  Thankfully for Canada, Pres Obama decided to kick the can down the road, by agreeing with the GOP on extending all American tax cuts creates a massive boost to “income” that “should” translate into additional spending.  In view of this pure Keynesian stimulus package (and I thought the GOP were solid Austrian economists… the joke is on me!).  In my opinion the BoC’s 2011 forecast appears to be too pessimistic.  I take the view that GDP growth will be closer to 3% (and maybe even slightly higher).  The reasons:

(1)               After a pause the housing (new build) market is rising again.

(2)               Massive capital spending by Canada’s corporation will lead to important productivity gains in Q1 or Q2, negating the impact of a strong currency.

(3)               Canadian dollar which is driven by natural resource prices will remain in the (overvalued) .97/.99 range as oil price continue to drift up (towards $100),

(4)               Inflation will remain above trend, but the BoC has little room to maneuver for higher rates.

(5)               Federal elections are almost certain in the spring; the government’s budget will be, at worse neutral, at best expansionary.

The second part of these predictions is 10 & 30 T-Bill rates.  Demand for CAD sovereign bonds is unlikely to slacken, especially if the federal government remains in control of expenditure and revenue continue on their current (positive) trend.  The 30 year bond will remain below 4%, but is unlikely to drop below 3.5%, the 10 year is going to remain in the 2.95/3.30 range.  The wide range on the 10 year T-Bill is because of my concerns with inflation.

Finally, Obama’s decision to extend the tax cuts has long term implication on America’s solvency.  Since neither Republicans nor Democrats have any interest/desire in cutting expenses, this decision will lead America to ruins.  It will probably take some time, especially since the US Dollar is a reserve currency, but the damage from this government massive operating deficit, will eventually have to be addressed.  Canada has to think long and hard how it addresses this risk.  My suspicion is that it is this risk that keeps Mark Carney up at night…