CANADIAN FIXED INCOME OUTLOOK

The long view: Still slow but steady

Jul 25, 2016

With few domestic growth drivers to pull on, Canada and its economic prospects will be tied to the global growth trajectory.

 



Canada’s is an open economy, intimately connected not only to the United States but also to the wider global economy. Canadians have long enjoyed the upside of economic openness. In 2015, the Canadian economy experienced the downside. Weak global commodities demand, the continuing supply imbalance in oil, and sharp competition in export markets worked together to suppress growth through much of the year. Shrinking GDP in the first two quarters preceded anemic growth in the third and fourth.

Will 2016 be different? To answer that question, we first need to establish the context for Canadian economic performance – namely, the outlook for the global landscape.

Global Backdrop: Economic cycles are turning

Historically, different economic cycles – for instance, the business cycle, credit cycle and the valuation cycle – impact investment outcomes through a complex interplay. In the remarkably long period since the financial crisis of 2007-2008, however, the global macro environment has been dominated by the monetary policy cycle. Cheap money has inflated asset prices, making both the credit and valuation cycles difficult to read. It has also flooded markets with liquidity, masking the business cycle.

Yet 2016 may herald a different reality. The flood of easy money may begin to dry up, as the U.S. Federal Reserve begins (albeit slowly) to turn off the taps. This expected gradual withdrawal of the monetary elixir will give way to other cycles becoming more important, for the first time since the financial crisis, in determining investment outcomes.

As monetary policy’s dominance recedes, the remarkable tepidness of the post-crisis recovery will become more obvious. In real terms, the Eurozone is still about the same size it was in early 2008. The spectre of recession has reappeared in Japan. Emerging markets face a host of challenges, structural and cyclical, while China’s slowdown is now beyond questioning. U.S. growth post-crisis has been the weakest it’s been in more than 50 years1. But at least it is growth. Other countries, like Canada, will continue to count on the American recovery picking up steam and carrying their economies with it.

They might be disappointed. The cyclical landscape is difficult to reconnoiter; our view is clouded by the emergence of deep, structural trends. In developed economies, populations are aging. Both the public and private sectors are deleveraging out of high debt loads. New technologies are displacing labour and suppressing wages. These factors are suppressing demand. The sustained levels of economic growth the world grew used to pre-crisis might not return. Inflation and corporate profits may well settle into a band well below historical norms.

Canada: Steady, but still slow

With few domestic growth drivers to pull on, Canada and its economic prospects will be tied to the global growth trajectory. Coupled with the decline in oil and commodity prices, the lacklustre global recovery weighed on Canadian growth in 2015. That will not likely change in 2016, as the oil price shock necessitates a multi-year structural adjustment in the economy. We forecast the Canadian economy will grow only moderately, with real GDP rising by just 1.5 percent.

Forecast Summary

Forecast summary

Source: Bloomberg and BlackRock

These modest expectations are based on our reading of growth drivers, which offer little potential for upside surprises.

Aubrey Basdeo
Head of Canadian Fixed Income, BlackRock
Aubrey Basdeo, Managing Director, is a member of the Strategy Team within BlackRock's Global Fixed Income group. He leads the product strategy effort in Canada ...