According to the Desjardins Group economic studies team, global economic and financial issues will continue in 2012 as the road to greater stability remains littered with obstacles. For example, Canada's growth drivers are weakening, the United States fears a fiscal cliff, the euro zone is in recession and China is becoming a concern. "The financial markets will remain on high alert through next year, with economic activity becoming subdued," said François Dupuis, Desjardins Group vice-president and chief economist.
In Canada, the pillars for growth are dwindling. Consumer spending is being slowed by the rebalancing of household budgets, while exports are being hurt by trade partner lethargy. Government spending is declining due to federal and provincial government budget cuts. And while the housing market remains strong enough to contribute to growth, the new credit conditions instituted by the Department of Finance in early July should turn this trend around in the next few months.
The key event this summer was the promise from the president of the European Central Bank (ECB) to do everything necessary to preserve the euro. It's in this context that the ECB can now make unlimited purchases of bonds from countries that have asked for help from the bailout fund to ease the financial pressures on these countries. On the other hand, there is still a lot to do in this region to stabilize the situation.
In China, economic concerns are growing and stimulus measures are being considered. And in the U.S., morale will likely be affected by the upcoming election results, by cuts to public spending or by tax increases that could occur in early 2013. "Given these difficulties, the global growth forecast has been lowered from 3.1% to 3.0% for 2012 and from 3.7% to 3.4% for 2013", added Mr. Dupuis.
The Desjardins Group economists also suggest that the central banks will hesitate to raise their key rates for several more quarters, with most still trying to stimulate growth. The U.S. Federal Reserve will likely wait until mid-2015 before going into action, pushing the string of two rate increases likely to be ordered by the Bank of Canada to early 2014. Downside pressure on yields will persist in the U.S. and Canadian bond markets.
The U.S. stock market will post a return of about 13% in 2012, a result that is much better than the 3% forecast for Canada's stock market, which is being hampered by a reduced enthusiasm for commodities. After this divergence in returns in 2012, the two stock indexes should climb 7% next year. "A number of factors will buoy the Canadian dollar, keeping it above parity until the end of next year," concluded the economists.
