Five economic themes to watch for in 2012

Dec 8, 2011 – 1:38 PM ET| Last Updated: Dec 8, 2011 1:41 PM ET

With the eurozone on the precipice of collapse, the United States grappling with its own debt issues and even China slowing down, what does 2012 hold for the global and Canadian economies?

CIBC World Markets Inc. released a handful of economic forecasts Thursday. Here are five key developments to look for in the year to come:

A hurdle for Canada’s unstoppable real estate market?

Benjamin Tal, CIBC’s deputy chief economist, said data on household debt and the health of the residential real estate market suggests a levelling off in prices in the next year or two with a more dramatic drop down the road.

“Further out, the most likely scenario is that the eventual increase in interest rates will lead to a modest decline in prices, probably in the magnitude of 10% to 15%,� he said.

But Mr. Tal said absent a trigger like the sub-prime mortgage crisis that triggered the recent U.S. housing market meltdown, a violent market correction is likely not in the cards for Canada.

Sluggish global growth in 2012 and not much to look forward to

“Excepting Europe, we’re not destined for recession, but global growth will barely top 3% next year, and 2013 won’t be a whole lot better, well below the bounteous 5% pre-recession pace,� said Avery Shenfeld, chief economist at CIBC.

The United States could defer its first round of budget tightening by extending tax measures for another year, he said, noting that if it does, “it will be feeling an even tougher fiscal squeeze in 2013.�

Meanwhile, Europe may have clawed its way back up somewhat by 2013 but growth there is still likely to be “lacklustre,� Mr. Shenfeld said.

The dark side of austerity measures

Apart from the pain felt by pension-holders, taxpayers and other stakeholders, harsh austerity measures being implemented across Europe may not be a silver bullet for return to growth.

“The myth that shrinking government brings an automatic offsetting boost to private sector spending is simply that — a myth,� Mr. Shenfeld said.

“The countries in Europe that have been first to tackle budget deficits through tax hikes or spending cuts have paid the price in growth.�

2011 GDP growth in countries that have tightened their belts already, including the United Kingdom, Spain, Greece, Ireland and Portugal, hovers at around 0.7% while other European Union nations had GDP growth closer to 2%.

“What helped Canada survive fiscal tightening in the 1990s — an ultra-cheap currency, strong growth outside our borders and falling bond yields — isn’t on the menu for Europe or the U.S. in 2012,� Mr. Shenfeld said.

Canadian growth stuck at 2%

Mr. Shenfeld predicted a pace of growth of about 2% over the next two years for Canada, which, as an open economy, can’t avoid the effects of a global economy on pause.

“Domestic fundamentals should guard against recession risks, but we will need a big lift from interest-sensitive domestic spending to keep the economy growing at even a 2% pace through 2013,� he said.

Although home building in Canada survived the recession, business construction and equipment spending will be in the spotlight over the next several years, Mr. Shenfeld said.

“Spending in energy, aluminum smelting, shipbuilding facilities and other private sector megaprojects will provide at least some antidote to the retreat underway in public sector capital spending as the recession’s stimulus is wound down,� he said.

He predicted exports would suffer, feeling the pinch from global economic slowing, but oil patch prices should hold up enough to facilitate ongoing capital spending in that sector.

The loonie takes a dive?

With weak global growth expected to continue to drive sentiment Mr. Shenfeld predicted the resource-linked Canadian dollar “has room to slide further in the coming months, until the crisis fires in Europe are quenched.�

He forecast the loonie dipping to US$0.92 before the currency regains support on diminishing fears of global crisis.

At noon on Thursday the Canadian dollar stood at US$0.9813.