Investor Forum - Economic Update

Global outlook brightens despite lingering political uncertainty, and Canada's growth accelerates

The past year has been marked by political turmoil, ranging from the vote for Brexit in June 2016  to the unexpected election of Donald Trump in November. Despite surges of populism and nationalism across Europe and the United States, the global economic picture and Canada's economic forecast has brightened, as reported by RBC Vice President and Deputy Chief Economist, Dawn Desjardins at RBC Investor & Treasury Services' recent Investor Forum.1

Economies shrug off political  uncertainty

The state of global political uncertainty can be measured by an innovative index that monitors, among other indicators, newspaper coverage of policy-related economic uncertainty.2 The Monthly Global Economic Policy Uncertainty Index tracked upward through 2016.  Normally, forecasters would expect such a rise to be paired with investment and consumer uncertainty.

Even in an environment subject to political turmoil, growth prospects have improved

Remarkably, noted Desjardins, this was not the case. Even in an environment subject to political turmoil, growth prospects have improved. In January 2017,  the International Monetary Fund revised its 2017  and 2018  projections for advanced economies upward.3 While the revised increases were modest, they have been nonetheless welcomed as positive indicators.

In the second half of 2016,  global growth picked up. Trade slowed in early 2016  and sped up in the latter months of the year, a trend that continued through to March 2017. Commodity prices also rose, with oil prices "recovering significantly" and West Texas Intermediate anticipated to move slowly back up to USD 60 per barrel.

Stronger growth  trajectory for US economy

In the United States, the latter months of 2016  saw the economy transitioning to a stronger growth trajectory, buoyed by consumer spending, declining unemployment, the recovery in oil prices, increased investment spending, and general global growth. The strong US dollar will likely limit a pickup in exports while allowing US companies to import cheaper machinery and equipment.

For Desjardins, the explanation for these imstproved prospects may lie in the "pro-growth agenda" of Donald Trump. She also observed that the US is now close to accomplishing two major monetary policy goals: controlling inflation and achieving full employment. With these targets within reach, more aggressive interest rate hikes from the Federal Reserve are coming into view.

US economic highlights

  • On employment, the US labour market is solid and wages are growing. Positive employment figures are helping boost the US housing market.
  • Robust employment and the resulting upward pressure on wages are combining to lift consumer spending
  • Business investment is "ramping up," with the investment recovery that launched in the first quarter of 2017 expected to continue through the year
  • While US net exports are expected to improve over the year, they are still slowing down overall US economic growth

Key insights

  • Political uncertainty is not translating into weak economic growth overall
  • Consumers are an increasingly important component of economic health across Canada and the US
  • In an interconnected world, a decline in the value of the Canadian dollar does not necessarily produce expected trade opportunities

Past performance is no guarantee of future results

In a "very welcome development," Canada  outperformed its peers in 2016,  and this momentum has carried forward to 2017.  Within Canada,  consumers and government are expected to "do the heavy lifting in 2017," explained Desjardins, with record-level household spending expected to move upwards through the balance of the year and job creation shifting into higher gear.

Federal fiscal support, for its part, will be felt in 2017  as the effects of the 2016  budget, including tax changes and infrastructure spending, percolate throughout the economy. One notable change is the enhanced Child Tax Credit, which delivered a "solid lift" to household spending.

While the Canadian economy has been performing positively, it is still subject to some uncertainty in light of US economic and political developments. If the Trump government cuts corporate tax rates, for example, the playing field for Canadian companies may be altered, affecting their overall competitiveness, suggested Desjardins. Expectations that the Canadian dollar's decline would bolster economicn trade between the US and Canada  "didn't really emerge," said Desjardins, as Canadian currencies competed for US demand with other currencies such as the Mexican peso. In addition, the Trump administration's stated goal to renegotiate or "terminate" the 23- year-old North American Free Trade Agreement (NAFTA) could prove an obstacle to sustained economic growth for the country.

In recent years the Canadian dollar has encountered "a lot of bumps in the road," particularly given Canada's overall dependency on oil prices. While the Bank of Canada may raise interest rates in the coming years, Desjardins commented that the central bank will remain cautious to not "rock the boat". In the near term, the Canadian dollar will likely come under pressure given the potential for interest rates to increase in the US.

Canadian economic highlights

  • Although the labour market is strong in Canada, that strength has not translated to higher wages
  • Household spending, while high, has not been accompanied by debt troubles for the average Canadian household. One-third of Canadians have no debt, and low interest rates have kept overall debt loads manageable for those carrying a balance.
  • Housing activity is expected to slow as a result of tightened borrowing standards and the actions of provincial governments to implement policy measures designed to slow the growth in housing prices.
  • Canada experienced a "weak patch" in 2016 as a result of the tumble in oil and gas prices, delivering a "very powerful blow" to Canada's overall economic activity. In 2017,  with the rise in oil prices, a modest spending increase by energy companies may be on the horizon.

Global economic prospects relatively  positive

Despite elevated levels of political uncertainty, global economic growth forecasts have improved for 2017.  The lesson? Political uncertainty and economic growth may not always negatively correlate with one another.

For Desjardins, the overall economic outlook is "relatively positive," with a number of factors providing confidence. However, as she noted in her closing remarks, "a tweet could change all that."


Sources

  1. RBC Investor & Treasury Services' Investor Forum (May 26, 2017): Economic Update
  1. Policy Uncertainty (May 2017) Monthly Global Economic Policy Uncertainty Index
  1. International Monetary Fund (January 2017) World Economic Outlook Update