Cloudy outlook for Canadian economy. Here’s what you need to know

Cloudy outlook for Canadian economy. Here’s what you need to know

Cloudy outlook for Canadian economy. Here’s what you need to know Many would agree that the Canadian economy has seen far better days, and a new economic analysis from the Desjardins group identifies different variables and events that contribute to the current malaise.

In an August 16 commentary published on the Desjardins website, the Fort McMurray forest fires in May were identified as a significant drag to the economy in Q2. While a rebound is anticipated to reflect in June, the economy is still expected to post a 1.4% retreat overall.

Contributing to the predicted slowdown are weakness in non-energy exports, a sector on which BoC Governor Poloz has been betting for a recovery, and the first retreat in the labor market since the 2008-2009 recession, as shown by recent trend-cycle metric figures from Statistics Canada.

Another point of woe for Canadian investors is continuing low bond yields around the world. A spate of monetary easing among central banks due to Brexit has depressed bond yields further. The situation is magnified in Canada due to disappointing economic numbers, and the fact that the low-rate environment is expected to persist for a long time is not likely to help matters.

Still, there is a bright spot. The piece reports considerably lower volatility in the Canadian dollar compared to what was seen in spring. The loonie is also considerably more stable against the US dollar compared to the euro.

It has faced several reductions over the past few months due to disappointing domestic statistics, appreciation of the greenback in the wake of positive US job creation numbers, and a spike in investor risk aversion following Brexit. However, the forecast increase in oil prices in the coming quarters, which it sees as due to a justified rebalancing in energy markets, should count as a positive point.

While the commentary is mixed leaning towards the downside for the Canadian economy, it sees an upcoming boost in the global financial markets. Stock markets reportedly resurged after the Brexit vote, large-scale bond-buying led by the Bank of England has inflated demand, and North American stock markets are seen to do well again as a result of low bond yields and rebounding commodity prices. Despite these rosy forecasts, though, caution is advised.

“Among other things, we could be concerned about the markets’ reaction if accelerating inflation were to force central banks to normalize monetary policy more quickly. The impression that the central banks will always be there to support the markets could also prompt the formation of financial bubbles. Investors must therefore remain vigilant, especially with riskier assets or sectors,” the statement reads.

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