It’s official, “cauliflower prices have peaked and the bubble is over,” according to Douglas Porter, Chief Economist, BMO Financial Group. Mr. Porter was surprisingly upbeat and provided several moments of comic relief during his economic forecast to a sold-out CPBI audience last Thursday, January 28th at the Fairmont Palliser Hotel. Although world markets ended the final week of January on an upswing, this was the second weakest January in the last 40 years. So, what’s causing this turmoil? Oil is the main culprit, and was really the last commodity to show weakness, when it started its decline in late 2014. Most of the other commodities have seen declining prices since about 2011. Over the past 25 years the average (inflation adjusted) price per barrel of oil was $55, which is probably about the right target going forward. Mr. Porter believes oil prices are close to bottoming and forecasts an average price of about $40 US (WTI) for 2016. He said 15 years ago $30 per barrel was really a ceiling price at which anything above was likely to cause an economic global slowdown – now $30 is the floor price for triggering a slowdown. Aside from oil prices Mr. Porter said, “Nothing is fundamentally broken - the world is generally trudging along.” He projects global GDP to increase by 3.3% in 2016, with emerging market economies expanding by 4.3%, and the G7 averaging 1.8% about the same as 2015. Canada is expected to grow by just 1.0% in 2016, which is less than half the expected 2.4% escalation for the U.S. Canada should start to catch up to the U.S. in 2017 with 2.1% growth, compared to 2.3% for our southern neighbors. However, he expects the TSX will outperform the S&P in 2016. Albertan’s are likely in for another tough year. Although economic conditions are likely to stabilize in 2016, the wagon wheels of progress in Alberta are unlikely to start gaining any significant traction until 2017. Retail sales, employment and real GDP for Alberta will all continue to decline in 2016. Alberta’s unemployment rate will be about 7.0% in 2016, which is just below the 7.1% national average forecast. Edmonton should be slightly lower at 6.3%. Mr. Porter says the best prospects for jobseekers will be in BC and Ontario. However, finding affordable housing in Vancouver or Toronto will be continue to be challenging, and despite prognostications of a housing bubble in these major centres, Mr. Porter doesn’t see a correction anytime soon. If you are planning to sell your house in Calgary, it will likely fetch about 2.3% less in 2016, but the cost of borrowing could be even lower. Mr. Porter projects the Bank of Canada will decrease its prime lending rate by 25 basis points in 2016, if the dollar stabilizes. For Canadians looking to take a winter holiday in the U.S. sunbelt, he’s forecasting that the Canadian dollar is close to bottoming and will trade at a $0.71 exchange rate in 2016, a far cry from parity just three years ago. The Canadian dollar’s decline against the U.S. greenback has been “one of the most dramatic declines we have ever seen.” Just 3 years ago we were at parity. He says that the Canadian dollar is highly correlated to the price of oil and that every $10 move in oil prices results in a three to five cent corresponding change in exchange rates. He also noted that Canada’s currency is not alone in the decline as virtually every other world currency has dropped against the U.S. dollar in the past few years. Mr. Porter says that parity was never really a realistic long-term benchmark. He believes that a more reasonable anchor for the Canadian dollar is about $0.80 U.S. He believes Mr. Trudeau’s government will and should run a $10 billion to $20 billion deficit this year to help stimulate the Canadian economy, but that provincial governments need to rein in spending. Obviously, it’s still very early in 2016 to anticipate what wildcard events could impact world economies; however, he says this year’s U.S. election outcome is likely to have an impact on financial markets. While this cycle seems to have has hit Alberta particularly hard, Mr. Porter said that Albertans have been through these cycles before and that the provincial economy will improve, it’s just going to take a little more time. - Kenneth MacDonald Please visit our WordPress Blog for a copy of the presentation |