What to expect in 2010
By Ben Tal
Predictions for economic growth, interest rates, the Canadian dollar, and the housing, bond and stock markets
Economic Growth: Despite a relatively strong performance in the latter part of 2009, overall economic growth in 2010 will disappoint. Look for only 2.1% increase in real GDP next year—a much slower pace than a typical recovery year. The reasons for the relatively slow rebound are: continued weak manufacturing and exports performance given a slow recovery south of the border and a strong Canadian dollar; some softening in the housing market; and the end of government stimulus.
Interest Rates: It appears that monetary policy in Canada is to a large degree being determined in Washington. The Bank of Canada will not be willing to raise rates independently of the Fed. And given the ongoing weakness in the U.S., interest rates there will not be an increase anytime soon. Accordingly, do not look for rates to start rising until after the mid-year move expected by the market.
The Canadian Dollar: While it appears that the Canadian dollar is overshooting a bit now and, in fact, might lose some ground in the very near future, it is still reasonable that the dollar will continue to improve during most of 2010 to reach parity by the end of the year. The main factors here are: a general weakness of the U.S. dollar, stable to elevated commodity prices and better economic fundamentals in Canada.
The Housing Market: It appears that the housing market is already overshooting by close to 7% and by 10%-15% in western Canada. While we do not expect a dramatic correction in the market, we expect the market to stagnate—mostly towards the second half of the year.
The Bond Market: Given our view that the Bank of Canada and the Fed will take their time with regard to the timing of the first upward move, it appears that markets' expectations of at least two moves by the third quarter are unjustifiable. This mispricing provides some upside opportunities in the bond market—mainly at the short end of the curve.
The Stock Market: It appears that the stock market is fairly valued from a short-term perspective, and still has some upward potential relative to its long-term potential (given a full cycle earning expectations). At this point, index investing will not be the best way to go. It seems that the nature of the demand will determine valuations in 2010, and this demand is for large recognizable names with high dividend payouts. Older conservative investors continue to sit on no less than $120 billion of extra cash.
Ben Tal is senior economist at CIBC.