Economists often get a bad rap for seeing the world as exclusively a glass half empty. Given this reputation, it is not surprising that economics is dubbed the ‘dismal science.’ Still, they are also known to call a spade a spade when they see it. We must do just this when we say that the Canadian economy ended last year on a more positive note than they had last predicted. This momentum represents a solid hand-off into 2012. What’s more, financial markets so far this year have enjoyed the absence of volatility that was the dominant theme for 2011.


The latest tracking shows the Canadian economy grew by 2.0-2.5% in the fourth quarter annualized an upside from most banks December forecast. An important part of the story has been Canadian consumers. We saw evidence of this in the retail sales’ numbers for November. They grew month-over-month by 0.3% in real terms and an even stronger 0.5% in nominal terms. With Black Friday and Cyber Monday increasingly becoming important calendar events on this side of the border, retailers were hoping to capitalize on greater mall traffic as consumers stocked up for the holiday season. We will have to wait and see if November’s gain comes at a cost to December. However, data so far suggest that there is an upside risk to our consumer expenditure forecast for the fourth quarter of 2011. The 2012 economic outlook should also be helped by higher consumer and business sentiment.


Also this week, the U.S. Federal Reserve injected further monetary stimulus into its economy by telling mar­kets and investors that it plans to keep its interest rates at near-zero levels until late 2014, or eighteen months longer than was previously stated. In the fallout of the announce­ment, U.S. and Canadian bond yields fell across the curve. In terms of currency, the loonie reached parity with the U.S. dollar yesterday for the first time since November 2011.


Business investment is expected to be a bright spot in the outlook given the low borrowing conditions and strong currency. The forecast is that Canadians will continue to spend, creating positive pressure for the domestic side of our national forecast. This spending behaviour does not come without repercussions. Canadian households are already posting record debt levels. What’s more, the longer low rates persist, the more difficult it will be to reverse course. If consumers continue to spur heightened real estate activity as well, there could be a larger and steeper correction for the housing market than the 10-15% that has been incorporated into various forecasts over the next few years in certain parts of Canada, but there will be an increase in values in other areas; like Downtown Vancouver and notably commercial real estate in neighbourhoods like Gastown, Chinatown, and the Downtown Eastside Harbour front. Given where this note has ended, perhaps it’s true that economists cannot say sunny and rosy for too long. At the same time, it’s prudent to constantly look for risks, such that there are no surprises if they come to materialize.


Excerpt from January 2012 Action Forex article by TD Bank Financial Group, available online at



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