Photo by Iain Bradbury

Positive economic predictions are proving to be true. According to Business Review Canada, Canada’s manufacturing sector has led the economy toward continued strength. Economic growth of 5% almost perfectly matches predictions. Retail sales’ 0.3% decline during January hasn’t affected the overall progress because the automotive industry balanced the loss, seeing a 2.8% growth in January. Growth in the manufacturing, transportation, and wholesale trade industries also pushed the economy forward, while the oil price increase’s impact on the economy has been minimal. A report by TD bank indicates that the Canadian economy is doing better than expected.

What’s coming

This forward momentum is expected to continue through the first half of the year: the annual average real GDP is expected to grow by 3.0%. In the second quarter of 2011, the negative consequences of Japan’s earthquake/tsunami disaster and global turmoil may inhibit growth. According to the Bank of Canada’s predictions, stretched household balance sheets are expected to restrain the pace of growth in consumer spending and residential investment. Business investment will probably rebound strongly, due to the low cost and high availability of credit and to investments by businesses to improve competitiveness. “We must improve our competitiveness. Recovery after a recession demands that capital and labour be reallocated,” explains Mark Carney, Governor of Bank of Canada.

Exports and business investment are also likely to drive growth forward. Among the provinces, Newfoundland and Labrador recorded the largest upward revision (with +1.1 percentage points) followed by Saskatchewan, Alberta, and Ontario, which each experienced boosts of about half a percentage point. However, it is speculated that the elections in May will divert this progress.

Housing market predictions

“In combination with tougher mortgage insurance regulation, rising interest rates will also dampen demand in the Canadian resale housing market as mid-year rolls around,“ the TD Economics report announced. The new mortgage insurance rules will increase the average monthly cost of carrying an insured mortgage. Despite these changes, the Canadian housing market is expected to remain balanced.

Recovery in Europe and the U.S.

Europe faces trouble concerning its government fiscal problems and the unity of the European Union, as stronger countries don’t want to pick up the tab for poorer countries like Ireland, Greece, and Portugal. This unrest could lead to one or more debt restructurings, which could impact European financial stability. According to the Chinese Daily, Chinese investments will play an important role in driving European economic recovery and generating employment.
The U.S. recovery is stronger than Canada’s, but reliant on monetary and fiscal stimuli. Massive U.S. fiscal imbalances also could cause financial market instability. Statistics show that the U.S. created 192,000 jobs in February — significantly more than was projected for the month. Economists believe the U.S. Federal Reserve will want to see payroll gains in excess of $200,000 for at least six to nine months and a significant decline in unemployment before starting to withdraw its massive monetary support from the economy. “If we start to add enough jobs, sufficient to lower the unemployment rate, I think the Fed will feel a little more comfortable in easing off the throttle,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Sceptical Canadians

Although the news and predictions are positive overall, Canadians are less optimistic about the national economy and their personal financial situations than they were last year, according to the RBC Canadian Consumer Outlook Index. Only 38% of Canadians believe their economic situations will improve this year. This pessimistic mood caused 46% of respondents to answer that they stayed within their budget because they didn’t want to increase their debt, and 67% confirmed that they didn’t overspend their holiday budgets. “We know that managing debt is top of mind for Canadians. Having a budget in place that you can stick to is one of the best ways to keep your finances in balance and take care of any debts,” said Ashif Ratanshi, head of Branch Investments, Deposits and Direct Investing at RBC. However, only 20% of Canadians stated that they are worried about losing their job or being laid off, while in 2010, 26% of respondents were anxious about their jobs. “As the economy continues to expand, we expect interest rates to drift moderately higher through the coming year. This should limit pressure on household balance sheets in an environment of continued employment gains,” noted Craig Wright, senior vice-president and chief economist of RBC.