Should Canada be worried by America’s shrinking real growth?

While the U.S. economy is performing better than our own it can hardly be considered a dynamo, but there might be enough gas in the tank to suggest a December rate increase is a sure thing say some experts

Should Canada be worried by America’s shrinking real growth?
All things are relative when it comes to economic growth.
 
Just yesterday, Dundee Economics Chief Economist Dr. Martin Murenbeeld told WP readers that global economic growth is expected to be 3.1% in 2015 and to register 3.6% in 2016. In comparison to both Canada and the U.S., some other economies appear to be humming -- but that was yesterday.
 
Today, Murenbeeld addresses the differences between the Canadian and U.S. economies in terms of growth and what this means for interest rates.
 
Again, it's all relative. The U.S. is booming in comparison to Canada, but when examined on its own the U.S. economy is hardly on fire.
 
"Our outlook for the U.S. hasn't changed much since the end of the great recession," Murenbeeld told WP. "We've been suggesting for the last five years, at least, that the U.S. is a 2.0% to 2.5% economy."
 
In other words, the U.S. economy hasn't been the same since before 2008 and Murenbeeld expects U.S. economic growth to remain tepid for at least the next year, and perhaps longer.
 
"U.S. economic growth will likely remain in the 2.0%-2.5% range, which is about what the Fed also projected in its Summary of Economic Projections (SEP) issued four times per year. The last SEP was in September. The central tendency for this year was 2.0% to 2.4% and for next year 2.2% to 2.6%.”
 
Although the growth projections for 2016 are somewhat troubling what’s even more concerning to Murenbeeld is the historical growth trend in the U.S.
 
"In sequential decades going back to the Second World War the U.S. economy's real growth rate has been declining,” said Murenbeeld.
 
While 2016 will not be a robust year by any means, growth will likely be sufficient for the Fed to incessantly debate when to raise interest rates. The tonic could come as early as next month.
 
"Ideally, the Fed should stand aside in December and say 'we're not going to do anything because inflation is not an issue', and if unemployment rates drop further, so be it," Murenbeeld reckons. "Given the incessant speculation however, some of us feel the Fed would now be best served to raise interest rates in December by 25 points and thereafter take itself out of the picture by saying that they do not see the case for another hike - and until they see that case they will keep quiet. This would be ideal."
 
That’s the U.S. situation in terms of economic growth and how interest rates play into the U.S. situation. Canada is a totally different ball of wax.
 
“Here in Canada we are in the midst of an economic shift, with Eastern Canada gaining manufacturing strength thanks to a lower dollar, and Western Canada, especially Alberta, suffering mightily from a commodity price free fall.”
 
"There is a very significant reduction in business investment in Canada because the resource side of the economy is seriously depressed and is big drag on GDP," said Murenbeeld. "Presently, the economy is caught between the shift from resources to manufacturing; the outlook for growth this year is only about 1%. Next year the Bank of Canada is looking for a 2% expansion but it could be lower.”
 
“We should think in terms of a 1.5% growth rate for the time being,” Murenbeeld concluded.
 
Canada's growth rate -- about half that of the U.S. -- suggests interest rates aren't going anywhere but down.
 
"The Bank of Canada has cut interest rates several times in the recent past to support the economy, which also had the benefit of lowering the Canadian dollar. The choice for the Bank of Canada over the next two or three quarters is between keeping rates where they are or cutting them further," said Murenbeeld. "A hike in US rates, because of its impact on the Canadian dollar, might stop the Bank of Canada from further rate cuts; the impact of a lower dollar would be the same as if the Bank of Canada lowered rates."
 
End of story. 
 

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