Economic analysis

Econowatch: Reasons for optimism in 2014

... and three signs you should run for the hills

Three reasons for optimism

1. Being led by the bulls: Want a reason to be hopeful about America’s economy next year? It’s in the stocks. Looking back over six decades, David Rosenberg, the chief economist at Gluskin Sheff, notes that every year when the S&P 500 climbed 20 per cent, the economy always grew the following year. (As of Dec. 9, the index was up 27 per cent.) In the worst years, GDP grew two per cent, while the average was 3.8. As such, Rosenberg says any surprise in 2014 will be to the upside: “The stock market has been, is today, and forever will be a leading indicator of growth.”

2. Corporate superheroes: Canadian companies are in a strong position to boost investment, thanks to their buckets of cash. Benjamin Tal, an economist at CIBC World Markets, estimates corporate Canada sits on a record $560 billion. Corporate debt levels are more manageable than they’ve been in years. Meanwhile, Canadian companies enjoy a bankruptcy rate of just three per 1,000 businesses, the lowest on record. All of this means companies are primed to invest, and hire, to capitalize on the rebound in global demand.

3. Europe’s sick man off life support: The global financial crisis was difficult to comprehend, but Greece taught a simple lesson: Debt masquerading as growth leads to collapse. “Acropolis Now,” screamed headlines, when it looked as though Greece might trigger the euro’s end. Well, all bad things must end. Greece’s GDP growth is expected to be flat, or even positive, in 2014. The country has wrested control of its budget, so that investors demand lower-risk premiums on the money they lend it, which, in turn, helps to ease austerity measures. Moody’s even lifted Greece’s credit rating two notches, though its debt is still in junk territory. A Greek recovery has its doubters, but the worst is behind it.

Three reasons to run for the hills

1. Hanging from the ceiling: Get ready for Round 3 of the political gong show known as the debt-ceiling crisis. Unless an agreement is reached to suspend the debt ceiling, it’s estimated America will have no room to borrow by March. While the Chicken Little effect may cause markets to yawn and assume another last-minute solution, here’s why they should worry: If the U.S. fails to lift its debt ceiling and the crisis drags on for months, the OECD predicts America’s economy would contract by nearly seven per cent and global stock markets would fall by at least 25 per cent.

2. Trading paces: After what some might consider a five-year anomaly, Canada’s unemployment rate is expected to surpass America’s in 2014, according to economists surveyed by Bloomberg. The median estimate for Canada’s unemployment rate was seven per cent, compared to 6.9 per cent in the U.S. Given the layoff news of late—Encana, Potash Corp., Sears and Bank of Montreal all announced deep cuts, not to mention a federal government that’s jettisoning workers—the job market looks grim.

3. Bringing down the house: Listen to economists at the big banks—and anyone with substantial skin in the housing market—and you’d believe prices in Canada, while lofty, are not too high and any correction will be gentle. Then there’s what everyone else in the world seems to think: Canada’s housing market is in the danger zone. Rating agency Fitch warns the market is overvalued by 21 per cent. The OECD pegs it at 25. Relative to rental rates, The Economist figures prices are 78 per cent overvalued. Meanwhile, Nobel prize-winning economists Paul Krugman and Robert Shiller fear Canadians have perilously overextended themselves to buy homes. A sharp correction would cripple Canada’s economy.

Brent Lewin/Bloomberg via Getty Images

Stock Signs

Dodging IPOs and oracle outing

  • Will Chrysler go public in 2014? Italy’s Fiat owns 58.5 per cent of the company and wants to buy the rest. A union health care trust, which owns the balance after Chrysler emerged from bankruptcy in 2009, wants to sell its stake in an IPO. A planned offering in 2013 was shelved but analysts expect a resolution to the dispute in 2014.
  • In 2014 Ontario will be the first province in Canada to offer green bonds, a way to borrow money to support projects with a benefit to the environment. How much will Ontario borrow, and for what projects? Those are details investors, and taxpayers, will have to wait to find out.
  • Will he stay or will he go? When Berkshire Hathaway shareholders gather in Omaha, Neb., for the company’s annual meeting in May, they’ll be looking for clarity from famed investor and octogenarian Warren Buffett on his succession plan. Even oracles have to retire.
  • As the loonie swoons, economists are lowering their exchange-rate forecasts for 2014—Goldman Sachs predicts it will fall to US88 cents. It could easily drop further. That’s good for manufacturers, but it will make it more expensive for Canadian investors to buy foreign stocks.

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The quote

‘For the first time in a long time, you don’t have to be an optimist to see the glass as half-full. The recovery has finally taken hold.’

—Mark Carney, Canada’s former top central banker, offering an update view of the future in recent speeches. As the governor of the Bank of England, Carney now holds the lever to Britain’s monetary policy.