Stable outlook and solid growth for Canada in 2005

Expectations are trending down from last year in this particular survey. Managers say long-term returns from bonds will average around 5% and equities will return around 8%. “In other words, single digit returns all around,” says Janet Rabovsky, senior consultant at Watson Wyatt Canada.

In a presentation to release the results, panelists also discussed the looming labour shortage expected in the next 10 years and the measures companies are taking today to improve productivity.

Ian Markham, director of pension innovation at Watson Wyatt Canada, says some companies are already having difficulty in hiring and retaining talented employees, and these are only the beginning signs of labour shortages to come. “If you’re already seeing trouble, you need to look at cultural change to become one of the best companies to work for,” he says.

More immediately, however, companies are looking at ways to improve productivity now that business is not bolstered by a cheap Canadian dollar. Manufacturing will probably suffer as a result. Commodities might also flatten if the less-than-rosy outlook for Chinese and U.S. consumer demand plays out. Lumber and crude oil are expected to fall and base metals also suffer from weaker industrial growth.

In the United States, GDP is estimated to grow around 3.3% in the first part of the year before pulling back to 3.2% and 3.1% over the medium and long term. South of the border, consumers are “refinanced out,” says Derek Burleton, senior economist at TD Bank Financial Group. In the year to come, he says, business growth and productivity will be drivers and job growth will be lacklustre, although productivity could possibly spill over into wage growth.

“The U.S. consumer is in debt, but still spending,” and may be subscribing to the theory that everyone should die broke, says panelist Benoit Durocher, president and Chief economist of Addenda Capital. “The last cheque you should write is to the undertaker and it should bounce,” he jokes.

Durocher discussed the impact different factors would have on the investing universe in the year to come. Burleton says China will likely revalue the renminbi in the year to come, a move that Durocher says will likely hurt the U.S. the most. But he says China still has significant room to grow before the government will be forced to revalue the currency or aggressively put the brakes on growth.

Overall, the managers surveyed estimate Canadian GDP will hold steady at 3%, while inflation will stick closer to the 2% mark.

Median forecasts predict the Canadian dollar will reach $0.85 U.S., dropping to $0.84 over the long term. These numbers suggest forecasters are anticipating the Canadian dollar will consolidate around this new, higher level. Last year’s expectations for the dollar were $0.78 U.S. in the short-term and $0.80 for the long-term.

Although other expectations for indicators such as the Consumer Price Index, government surpluses and labour productivity appear to be trending down, and there is dispersion in the results — perhaps indicating the managers are not as confident in their predictions — the 2005 forecast is actually not all that different from last year’s. “It’s quite a stable forecast,” says Rabovsky.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com

(01/18/05)