Sentiment about the US economic outlook has improved dramatically in the two months since our last forecast. This is very good news for the Canadian economy and also very good timing as the economy is likely to face some headwinds in 2011 from potential consumer restraint, exchange rate pressure on exports and slowing residential construction. However, the increasingly positive economic outlook is already in danger of being swept aside by a looming crisis in the Middle-East and North Africa (MENA) region that is threatening spill-over to global markets and Canadian interest rates.
An improved outlook in the United States has prompted us to revise our forecast for Canadian real GDP growth from 2.1 per cent to 2.8 per cent in 2011, which we anticipate will be followed by 2.7 per cent growth in 2012. However, evolving geo-political events in the MENA region may provoke a re-assessment of growth expectations. While events in Egypt and Tunisia had little economic ramifications, potential disruptions to global oil supply from Libya and other oil-producing countries has the potential to prompt serious market disruptions through escalating oil prices.
The dynamics of how oil impacts the Canadian economy are complex. As an oil exporting country, higher energy prices can have a positive impact on growth. However, the negative impact of high oil prices is two-pronged. First, high oil prices (beyond $120 per barrel) have been shown to significantly reduce US economic growth. Moreover, the Canadian dollar has for years been tied to the price of oil. As oil rises, so too does the loonie, which may present a serious challenge for Canadian trade. Therefore, the negative impact of an oil shock likely outweighs any positive effects for the Canadian economy.
Regarding inflation, our view remains that inflation is not likely to be a problem in the medium term. However, inflation expectations have ticked higher in recent months, a result of both positive incoming economic data and some pricing pressure from soaring food and energy prices. So far, the sharply higher food and energy prices that have been pushing headline CPI inflation higher have not found their way through to core-measures of inflation watched by Central Banks. Moreover, as an oil producing country, much of the inflationary impact of an increase in energy prices tends to be offset by an appreciation in the loonie – which has hit a three-year high of $1.03 US as oil prices pushed over $100 US per barrel.
An improved outlook in the United States has prompted us to revise our forecast for Canadian real GDP growth from 2.1 per cent to 2.8 per cent in 2011, which we anticipate will be followed by 2.7 per cent growth in 2012. However, evolving geo-political events in the MENA region may provoke a re-assessment of growth expectations. While events in Egypt and Tunisia had little economic ramifications, potential disruptions to global oil supply from Libya and other oil-producing countries has the potential to prompt serious market disruptions through escalating oil prices.
The dynamics of how oil impacts the Canadian economy are complex. As an oil exporting country, higher energy prices can have a positive impact on growth. However, the negative impact of high oil prices is two-pronged. First, high oil prices (beyond $120 per barrel) have been shown to significantly reduce US economic growth. Moreover, the Canadian dollar has for years been tied to the price of oil. As oil rises, so too does the loonie, which may present a serious challenge for Canadian trade. Therefore, the negative impact of an oil shock likely outweighs any positive effects for the Canadian economy.
Regarding inflation, our view remains that inflation is not likely to be a problem in the medium term. However, inflation expectations have ticked higher in recent months, a result of both positive incoming economic data and some pricing pressure from soaring food and energy prices. So far, the sharply higher food and energy prices that have been pushing headline CPI inflation higher have not found their way through to core-measures of inflation watched by Central Banks. Moreover, as an oil producing country, much of the inflationary impact of an increase in energy prices tends to be offset by an appreciation in the loonie – which has hit a three-year high of $1.03 US as oil prices pushed over $100 US per barrel.