Economists Sheryl King and Avery Shenfeld
Last year was bumpy for the Canadian economy. What's in store for 2011? Most economists see slow growth - averaging about 2.4 per cent for the year. But opinions are split on how it will play out, from how the loonie will fare to how fast interest rates will rise. Here, a bull and a bear duke it out:
THE OPTIMIST: Sheryl King, head of Canadian economics at Merrill Lynch
You see the economy growing about 3.1 per cent this year. What will drive this growth - and what will hold it back?
The main factor generating growth is going to be capital spending. This year, businesses, particularly non-financial businesses, are in a particularly good spot to be able to spend. They have a lot of cash on the balance sheet and very low levels of debt. They have been-underachieving for a number of years, and if they want to achieve those productivity gains to become more competitive, with the Canadian dollar near parity, this is a good opportunity.
The government sector will throttle back. Fiscal stimulus will be more of a net drag in 2011, though private sector activity will more than offset it ... The housing sector will actually be a drag on economic activity.
Where do you see the currency this year?
My gut tells me we'll have a higher currency this year.
Our jobless rate is now 7.6 per cent. How will the labour market fare in 2011?
I definitely think the rate will move lower and if anything will punch below 7 per cent.
The Bank of Canada has held the line on interest rates since September. By what magnitude will rates move this year?
Given the fact that the consumer continues to buy and they target consumer price inflation, we're going to have some upward pressure and the breach of the 2-per-cent [inflation]target this year. Agricultural prices in Canada are up 24 per cent on a year-to-year basis and core CPI is 20 per cent food. I think March will be the first hike for the bank. That will be the first in a series of hikes that will bring the overnight rate to 2.5 per cent at end of 2011.
Inflation remained fairly tame this year, though prices for some foods and services do appear to be creeping higher. What's your outlook for inflation?
It's not just coming from agricultural prices. We do have labour costs on the rise, we have regulated prices on the rise - from tuition fees to property taxes and public transit. Even headline inflation will come back, with energy prices on the rise as well.
Consumers remain heavily indebted. What's in store for consumers in the coming year?
It's something that remains a concern, and you have to ask why - it's because interest rates are so low, it's very easy to take on debt. Our sense is a lot of the levering up is coming from home equity lines of credit. And there, the Bank of Canada, to convince consumers that this shouldn't be a source of financing, could just raise rates.
Commodity prices soared in the second half of last year. Record gold prices have sparked chatter of the yellow metal as a reserve currency. How do you think oil, gold and metals will fare this year?
In this world of risk aversion and concerns about the U.S. currency, gold is where you want to be, regardless of whether you think the global economy will go back into recession, with a wave of defaults, or massive inflation. As long as we have these expectations of where the global economy's going to go, there's a lot of upside for gold.
Our analyst is thinking we'll get a spike to up to as much as $100 a barrel [for oil]at some point in 2011. Base metals will benefit from the fact that global growth remains strong, and emerging Asia is particularly strong. We see commodities up about 8 per cent this year.
In the global economy, where will the strongest and weakest pockets of growth be?
Europe is going to continue to struggle. We're still fairly optimistic about the core European economies - Germany and France, Germany especially. But that's not going to be a growth leader. In the U.S., there is going to be an acceleration in growth through the course of 2011. Developed markets, like Canada, will hold steady while emerging Asia will slow, but from an accelerated pace.
THE PESSIMIST: Avery Shenfeld, chief economist, CIBC World Markets Inc.
You see the economy growing about 2.2 per cent this year. What will drive this growth - and what will hold it back?
Canada isn't operating in an ideal world. As an exporting nation, we do better when global growth is red hot, and when the Canadian dollar is in a position that makes "Made in Canada" cost competitive - and at this point we don't have either of those factors working for us.
We are getting some strength from business capital spending, so a strong Canadian dollar and competitive tax rates is helping induce a recovery in business investment spending and we expect that to continue. We have reasonable growth in personal consumption spending as well.
Where do you see the currency through this year?
We will likely spend most of this year between parity and 5 cents weaker than parity with the U.S. dollar, which by historical standards is still quite a strong level.
Our jobless rate is now 7.6 per cent. How will the labour market fare in 2011?
We see the unemployment rate edging higher, then easing back to 7.7 per cent by the end of 2011.
The Bank of Canada has held the line on interest rates since September. By what magnitude will rates move this year?
Until the Federal Reserve is hiking rates, it's going to be hard for the BoC to take our overnight rate above 2 per cent without sending the Canadian dollar to levels that cause even more of a challenge to our exporters. By the end of 2011, we have it at 1.75 per cent [up from 1 per cent today] So only a few hikes.
Inflation remained fairly tame last year, though prices for some foods and services do appear to be creeping higher. What's your outlook for inflation?
I don't see much momentum in inflation. We expect oil prices to come down a bit, which will help cool fuel costs. So both the headline and core inflation rate will average just under 2 per cent for 2011. The global pricing environment is fairly soft, so the prices for what Canada imports should be held reasonably cheap, other than food. And domestically, wages aren't escalating that rapidly.
Consumers remain heavily indebted. What's in store for consumers in the coming year?
We have consumer spending growing slightly less in 2011 than in 2010. Part of that is the impact of interest-rate hikes, and a slightly less buoyant housing market. One way or another, either consumers will slow the pace of debt accumulation on their own, or policies will be taken to slow it. And that will translate into bringing spending closer in line with income growth.
Commodity prices soared in the second half of last year. Record gold prices have sparked chatter of the yellow metal as a reserve currency. How do you think oil, gold and metals will fare this year?
You should ask a psychologist about gold before you ask an economist. Because it's not a commodity that's well tied to fundamentals of economic growth as oil or metals. Gold isn't used, it sits there in bars and its value is in the eye of the beholder. I can still see gold moving higher if only because it's a momentum trade and investors are piling into it.
We expect oil to settle at somewhat lower prices in 2011 than we're seeing late in 2010. There's still long-term upside in that commodity price, likely only to be realized when the world's economy is running at full steam. Inventories still look quite plentiful.
In the case of metals, China is going to be taking steps to ease growth to contain inflation, and so we have copper prices averaging below where they are now.
In the global economy, where will the strongest and weakest pockets of growth be?
In both direction and absolute growth, the fastest pace will be in emerging markets, but there will be some decelerating, largely because of steps to contain inflation. The U.S. looks to be picking up a bit. Europe is ending on a healthy note, but will slow due to fiscal tightening.
Comments have been condensed and edited.
Tavia Grant