Recent Global Events Cause Economic Concern But Should Not Lead To A New Recession: CIBC World Markets
Written by Newsroom
Thursday, 17 March 2011 12:55
The recent global events in Japan & the Middle East have undoubtedly given rise for concern
about the strength of the global economy, however, according to the latest GPS Monthly report
from CIBC World Markets Inc., they should not push the world back into recession.
"After riding some strong tailwinds late last year, the global economy finds itself buffeted by
new and, in some cases, completely unforeseen developments," says Peter Buchanan, senior
economist at CIBC. "While the risk of outright recession would still appear to be quite low, those
developments have led to a scaling back of earlier optimism and an increase, for now at least,
in risk aversion.
"Surging gasoline prices raise questions about whether U.S. consumer spending can continue
its healthier pace. With the focus on containing red ink, governments in the industrialized world
are reaching for the spending axe. Moreover, monetary policy in last year's hot performers―the
emerging markets―is poised to tighten further, hampering growth as inflation tops official
targets."
Mr. Buchanan thinks that oil prices would have to reach $160 a barrel to derail the economy
recovery, a scenario he does not see playing out. "Oil has risen dramatically before, only to
crash back to earth, and there are still good reasons why history may repeat itself.
Industrial-country inventories were adequate when the Middle Eastern political pot began
bubbling.
"OPEC likes firm prices, not sky-high, recession-inducing ones that crush oil demand, and the
Saudi's recent output hike suggest the cartel has at least some spare capacity, in contrast to the
situation when oil spiked three years ago."
He notes that strong but not sky-high oil prices are also best for the Canadian economy. "The
Canadian dollar followed crude north in the 2008 spike only until prices hit $100 a barrel. That
would seem to suggest that for Canada the negative effects of costlier oil, like weakness in
trading partners and auto sales, begin to increasingly outweigh producer rents once prices
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Recent Global Events Cause Economic Concern But Should Not Lead To A New Recession: CIBC World Markets
Written by Newsroom
Thursday, 17 March 2011 12:55
reach triple digits."
Using a standard statistical modeling approach, Mr. Buchanan found that it takes about a year
for the U.S. economy to feel the full pinch from an oil price shock. As Canada is one of the
world's top dozen net exporters of oil and oil products he found that in the near term higher
crude prices are a modest plus for the economy. A 25 per cent rise in prices - roughly the recent
increase - ordinarily lifts real GDP growth by a couple of ticks in each of the two following
quarters.
Beyond a couple of quarters, the negative effects, including the drag on key trading partners
and auto sales, begin to outweigh the positive, hurting GDP growth. Beyond four to five
quarters, the bad more than cancels the good, and the level of GDP is actually lower than it
would otherwise have been. A further negative is the increasing drag from the induced
appreciation of the loonie on the country's non-energy exports.
The report also notes that in addition to higher oil prices, global growth is also being dragged
down by increased government fiscal restraint, particularly in the U.S. "Although rising debt
levels will result in dramatically higher interest payments over time, cutting spending sharply
while the economy is still recuperating is not without risks," adds Mr. Buchanan. "The blow from
front-load spending reduction is one reason we expected the U.S. growth numbers to sport a
two- rather than three-handle moving into 2011."
The negative impact of oil price hikes and government cutbacks has seen CIBC's forecast for
2011 U.S. GDP growth drop a tenth of a point to 2.7 per cent. Fiscal restraint will continue to be
a drag on growth in 2012 as measures like the $120 billion social security tax cut expire. The
Federal cuts will be further compounded by spending reductions by state governments.
Another risk to global growth is the fact that emerging market economies are likely to increase
monetary tightening and other restraint measures to tackle inflation to ensure long-term price
stability. "That will cool performance in what, to this point, have been some of the world's hottest
performers. While those economies are unlikely to sink into recession, growth simply won't
surprise to the upside the way it has in recent years."
While Canada is not immune to the economic issues facing the global economy the report
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Recent Global Events Cause Economic Concern But Should Not Lead To A New Recession: CIBC World Markets
Written by Newsroom
Thursday, 17 March 2011 12:55
forecasts Real GDP growth of four per cent in the first quarter of 2011. As a result, Mr.
Buchanan expects a Bank of Canada rate hike in May.
3 / 3
Lisette Amalfi, AMP
Mortgage Broker/Owner
Mortgage Alliance OAC Mortgages Inc.
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