Resources will help boost economy, CIBC says

Canada's natural resources will help the national economy outshine the U.S. economy this year, and drive the loonie up well beyond parity by the end of 2008, says a new forecast by CIBC World Markets.

The bank's economists see the dollar ending the year at $1.05 (U.S.) because of strong commodity prices and a persistent spread between Canadian interest rates and much lower U.S. rates.

And Canada's economy will likely grow 1.6 per cent in 2008, followed by a robust recovery to 3 per cent in 2009, despite recessionary conditions in the United States that will stifle any growth in Ontario.

“The energy- and resource-rich Canadian economy will manage to sit out this U.S. recession, just as it did back in 2001. Only this time around, sitting out will be a more impressive achievement, since unlike in 2001, U.S. consumer spending is now likely to fall,” writes chief economist Jeff Rubin
“Certainly there are still parts of the Canadian economy that move very closely to the cyclical rhythms of its much larger trading partner, but the resilience of resource markets, particularly energy prices, heralds a new measure of economic independence for Canada.”

Other forecasters see a softer Canadian currency and lower growth for Canada, mainly because they assume that the strength in commodity prices can't withstand a U.S. recession.

But CIBC believes that commodity prices will remain strong regardless of what happens in the United States. And as a result, corporate and personal income in Canada will remain bountiful, fuelling domestic demand and diluting the harmful effects of the U.S. downturn on Canadian exports.

Manufacturing, especially in Ontario, will be hurt, however, and Ontario will be the Canadian province closest to recession this year, the forecast projects. CIBC expects the Bank of Canada to continue cutting its key interest rate for this reason.

Inflationary pressure will likely rise in Canada, however, because the rising Canadian dollar can't insulate Canadian prices from rising energy and food prices forever.

Core inflation, which excludes food and energy, may well remain at acceptable levels, but core inflation is “rapidly losing its relevance in the face of a secular rise in food and energy prices,” said Mr. Rubin.

The U.S. economy is clearly in rough shape, the report says, but the recession will likely be mild and short-lived because of dramatic interest rate cuts by the U.S. Federal Reserve and a massive government bailout package ready to kick in soon.

“The U.S. economy spent most of 2007 confounding the markets with its resiliency, and 2008 should be no different,” writes economist Meny Grauman.

The U.S. economy will likely contract in the first half of this year, but then begin recovering steadily, he says. CIBC sees 0.9 per cent real growth in the United States this year, followed by a healthy 2.3 per cent next year.

The global economy will slow “markedly” to about 4 per cent, CIBC said, but that's a far cry from a global recession, normally defined as growth of about 2 or 3 per cent.

The CIBC forecast is considerably more upbeat than one released last week by the International Monetary Fund. The IMF expects the U.S. economy to recover slowly from its slump. The weakness will spill over significantly into global growth, with the world running a one-in-four chance of falling into recession, the IMF said.

For Canada, the IMF expects 1.3 per cent real growth this year, followed by 1.9 per cent next year.