The year 2013 will likely be remembered more for its political entertainment (Rob Ford, the Senate) than for its economic news. Amidst all the political excitement, the Canadian economy has performed well and the TSX is set to post a decent return, albeit lower than most global indices. So, what’s next? Three major themes highlight the type of economic environment we should expect in 2014.
Interest rates are expected to remain low longer than expected: The new Bank of Canada Governor, Stephen Poloz, has a delicate balancing act ahead of him. Even though Statistics Canada has reported healthy growth of 2.7% for the third quarter of 2013, the consumer price index for October fell to a miniscule 0.7 percent, below the central bank’s target band of 1 to 3 percent. Disinflation and the threat of deflation is a central banker’s worst nightmare. Even though the idea of lower prices sounds good on the surface, prolonged falling prices eventually causes an economic death spiral where consumers delay spending, growth disappears and real debt burdens arise. Just six weeks after signaling that the Bank of Canada was preparing to increase rates, Mr. Poloz will now likely keep its trend setting rate at 1 percent, the level that it’s been since late 2010. Some economists now think a rate cut is real possibility. Either way, a rate hike seems highly unlikely before 2015.
Lower loonie will benefit Canadian exports: The Canadian dollar started 2013 close to par with the US dollar, but has since fallen 7% to 94 cents US. The Canadian dollar also fell over 10% versus the Euro this year. Low commodity prices as well as the Bank of Canada’s new signal towards keeping interest rates low are two significant weights pulling down the loonie. This is good news for Canadian exporters; in particular, those who do business in the US and Europe. A weaker loonie makes our products relatively cheaper, which improves the bottom line for many Canadian exporters. A weaker Canadian dollar also makes our manufacturing sector more competitive, creating opportunities for regions like Ontario’s Southern Golden Horseshoe. For example, the Canadian operations of the Detroit “Big Three” auto makers are integrated in such a way that labour costs are $2 higher in Canada when the currencies are at par. The recent decline in the loonie means that labour costs that are now cheaper in Canada when relative to the US. The weak Canadian dollar comes at a time when the US economy, by far Canada’s largest trading partner, continues to show strong signs of recovery. Canada also has a brand new trade deal with the European Union, which will further benefit Canadian exporters as that region recovers.
Regulatory reform will continue: Governments and regulators around the world will continue working to ensure that another financial meltdown doesn’t happen. In the US, regulators will continue to punish Wall Street for the 2008 financial crisis. JP Morgan Chase has already agreed to a record $13 billion (US) settlement with regulators. It is highly likely that more headline grabbing fines in the US will follow. In Canada, which was spared much of the fallout from the financial crisis five years ago, regulators will continue to refine their protective rules. The focus for 2014 will be on investor protection. Canadian regulators are asking for more disclosure on mutual fund fees and how financial advisors are paid. This has the potential to impact or even eliminate some advisor-client relationships. In the U.K, which has already adopted new rules designed to raise professional standards for financial advisors and introduce greater clarity on fees and services, the impact is already being felt. According to BlackRock Asset Management, it is expected that the advisor community in the U.K will decrease by over 20% over the next three years.
Paul Carvalho is President, Chief Economist and Wealth Advisor with Reeves Private Wealth. He has spent 15 years in finance with a global custodian bank, a major investment firm and a Canadian Chartered Bank.