The Bank of Canada is unlikely to change interest rates in 2013, particularly with inflation so low, according to Scotiabank’s head economist.
“Under the current forecast, we don’t see interest rates in this country changing at all over the next year or so,” said Warren Jestin, chief economist at Scotiabank.
“Inflation is going nowhere fast. We may see some inflation in food prices or other areas but by and large the economy is too soft to generate inflation. There is no cost push in place.”
Jestin’s remarks came at the bank’s annual outlook event, held Wednesday in Toronto.
The global economy faces big challenges from the European sovereign debt crisis and the U.S. fiscal cliff, the slate of automatic spending cuts and tax hikes that will take effect at the end of this year unless lawmakers come up with a better plan.
At the same time, the global economy is changing, Jestin explained.
China’s economy may grow at 7.5 per cent for the next several years, rather than the 10-percent rate that it averaged over the last 25 years.
Growth is also likely to slow in India, Russia and Brazil.
“All these countries are expected to grow at a multiple of what we are going to expect in good years and bad in Canada, the U.S. Europe and Japan,” Jestin said.
China, for instance, is now the biggest automotive market in the world.
“The old paradigm was countries like china were low cost supplies of exports into the North American space. The new paradigm is they are the markets and the market opportunities and that is a very profound change.”
Global growth is likely to come in at about 3 per cent in the coming year, and “an increasing percentage of that growth will come from the emerging world.”
Still, “We’re reasonably optimistic about North America as we go through 2013 and 2014 and for all the challenges that we’re reading about, the opportunities are fairly substantial,” Jestin said.
Among the countries that use the common euro currency, many are in recession, or on the brink, with the exception of Germany.
“We will be talking about Europe as a debt problem five years from now. We will be morphing into different scenarios but the math doesn’t work,” Jestin said. “And if growth isn’t there, it’s not helping the revenue side of the equation.”
Though Canada’s economy has performed very well since the 2008 recession, it will now begin to slow as consumer spending and the housing gear down.
Housing markets in Vancouver and Toronto will see “a bit of a correction,” not a bubble bursting, Jestin said, adding that the economy and households in Canada are in far better shape than in the U.S. prior to the country’s housing bubble.
“We would only be more concerned about the housing market in Canada if we were to see a fracturing of job opportunities and declining employment. The fundamentals there remain pretty solid.”
The U.S. economy is likely to grow at a higher rate than Canada’s in the coming year or two, Jestin said.
The Canadian dollar is likely to remain close to par in the coming year, chief currency strategist Camilla Sutton said.
A soft landing for the Chinese economy, high oil prices, and Canada’s sound fiscal plan will help strengthen the loonie.
On the investing side, stock markets will remain volatile, though the improving U.S. economy should help boost equities, investment strategist Vincent Delisle said.
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