Canadian Treasurer

December 19, 2011

The euro zone impacts global economic growth, Desjardins Group economists

QUEBEC-- According to the Desjardins Group Economic Studies team, the sovereign debt crisis in the euro zone worsened until it eclipsed all other large financial, economic and political problems elsewhere in the world.

"2012 will still be a difficult year on a global economic and financial scale, but a glimmer of hope is emerging for 2013," stated François Dupuis, Desjardins Group Vice-President and Chief Economist.

Will Canada be able to disregard the European crisis?
As the economic situation deteriorates rapidly in Europe, Canada  will take slow but steady steps forward. The U.S. economy's weakness will give our exports some trouble. Commodity prices should also weaken in 2012, on the global slowdown. Domestic demand is waning, reflecting the beating consumer and business confidence is taking as a result of the financial crisis in Europe. Governments also remain strongly committed to fighting public deficits by cutting spending. "In this context, the labour market will be fairly calm in 2012, cooling consumer spending and residential construction. Real GDP growth in Canada  should reach 2.1% in 2012 and 2.5% in 2013," emphasizes Yves St-Maurice, Senior Director and Deputy Chief Economist at Desjardins Group.

International exports of goods and services will be the Achilles heel for Québec and Ontario, given the weak U.S. economy, the euro zone recession and the precarious situation elsewhere in the world. The loonie will be slightly below parity throughout 2012, without going low enough to give the manufacturing sector a good push. The housing sector will not shine in these two provinces, either. Ontario should see public spending contract. In Québec, it is the heavier tax burden, with a higher Québec sales tax (QST), that could hinder consumer spending. On the other hand, business investment should continue to stimulate the economy and encourage productivity. Ontario's real GDP should grow 1.9% in 2012 and 2.4% in 2013; in Québec, growth will be 1.7% and 2.3% for those years.

More questions without answers
Quickly finding solutions to the current crisis that meet with the unanimous approval of the 27 countries of the European Union or the 17 members of the euro zone is no small feat. The fiscal pact reached in December is a step in the right direction, but many questions remain unanswered, especially regarding the financing of the proposed bailout and stabilization mechanisms. In this situation, it is difficult to predict the fallout, especially the reactions of financial markets and credit rating agencies.

With a few rare exceptions, all major countries will see their growth slow in 2012. The recession that is beginning in the euro zone is more certain than the outcome of the financial crisis. At 3.1%, global economic growth will be on the threshold of what the International Monetary Fund considers a global recession. "But this is assuming that the current crisis will gradually wane throughout 2012; if not, the drop could be bigger" added Mr. Dupuis.

U.S. domestic politics have been conflict-ridden and not conducive to an environment favouring improved economic conditions. Yet Americans need strong economic leadership. Even though the economic indicators have improved, there is nothing to show that sustained growth is on the way back. As a result, economic growth should hit 1.8% in 2012 and 2.1% in 2013, compared with 1.7% in 2011.

Concerted efforts of central banks for low interest rates
The major central banks will avoid raising their key rates in 2012. This applies to the Federal Reserve (Fed), Bank of Canada  (BoC), Bank of Japan and Bank of England (BoE). The persisting crisis in the euro zone will prompt the European Central Bank (ECB) to lower its key rate to 0.50% by the end of the first quarter of 2012. In 2013, the BoC could be the first to return to gradual key rate increases, around mid-year, followed by the BoE and ECB. However, the Fed should wait until the start of 2014.

If the concerns about the euro zone manage to ebb, the likelihood is that investors will gradually abandon the bond market to look at riskier products, such as equity. The major U.S. and Canadian stock indexes could thus advance by nearly 8% for both 2012 and 2013. "Performance by North American bonds could, however, suffer," concluded Desjardins Group economists.




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