As America’s economy tanks, Canada’s financial fortunes have remained relatively positive; until now, that is. One of Bay Street’s most vocal bulls is reassessing his outlook for the S&P/TSX Composite index, as stagflation becomes an increasingly greater threat.
CIBC economist Jeff Rubin announced today that he expects the TSX to hit 14,300 this year, and 15,250 by the end of 2009, down from previous predictions of 14,500 and 16,200 respectively.
He says the combination of 1% real GDP growth, inflation over 4% and a tighter monetary policy south of the border “will be challenging to large swaths of the stock market, particularly anything connected to the energy-exposed transport sector.”
Sal Guatieri, a senior economist at BMO Capital Markets, also expects the Canadian economy to suffer in the long run, thanks to America’s financial woes. “The weak U.S. outlook means Canada’s economy will struggle to expand even modestly this year,” he writes in his regular economic report.
He explains that the housing market and credit issues “will need to time to unwind,” while banks will keep de-leveraging as they continue to deal with loan loss provisions. He adds that Americans will need time to “rebuild savings, pay down debts and emerge from a deep funk.”
Canadians can expect an uneven economic performance in the coming months, as growth will continue in the west, but stall in the east. Guatieri points to Ontario specifically as a province that will likely suffer in 2008. “Ontario’s economy shrank in Q1, and will hardly expand this year,” he says.
Guatieri also predicts Canada’s housing market will cool, especially condos and cottages, while consumer spending will “moderate” from last year’s 22-year high.
There’s no question that the energy sector will continue to perform well, at least in Rubin’s mind. He’s adding another half percentage weighting to the energy holdings of his Strategy Portfolio, and continues to predict that oil will hit $200 a barrel by 2010. The CIBC chief economist expects “significant” merger and acquisition activity in the energy sector as Canadian oil sands make up nearly 70% of the world oil reserves that are open to private investment.
The consumer discretionary and industrial sectors, on the other hand, are not looking so hot. Rubin expects new auto sales in the U.S. to drop to 11 million vehicles over the next two years, which means more bad news for the already suffering Ontario. The aviation industry is also in Rubin’s bad books, as rising oil prices and huge financial losses are making flying less attractive to consumers.
While two of Canada’s economists think the country’s economy is in dire straights, the Bank of Canada has different ideas. “Clearly, the BoC doesn’t believe the economy is on the cusp of recession,” says Guatieri, pointing to the lack of recent rate cuts as proof.
He adds that the Bank of Canada should “refrain from tightening until mid-2009” if commodities moderate and economic growth stays soft.
Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(07/07/08)