Oil shock are proving more challenging than first thought

Highlights

• Adjustments to China’s economic rebalancing and the oil shock are proving more challenging than first thought, and as a result global growth remains soft. With downside risks lurking and GDP growth nearing stall speed despite the extension of expansionary fiscal and monetary policies, the probability of recession has arguably increased. We have lowered our forecast for global growth this year by one tick to 3.1%.

• The US economy just posted its worst two-quarter sequence since 2013. The meagre 1% annualized growth on average for 15Q4-16Q1 supports the Fed’s cautious approach to monetary policy. While trade will continue to act as a drag on the economy courtesy of earlier USD appreciation, domestic demand should again contribute to growth thanks largely to consumers, although not to the same extent as last year. Indeed, employment creation is set to moderate in synch with plunging corporate profits, and the benefits of low pump prices will also fade for consumers. We have lowered by one tick our forecast for 2016 US GDP growth to 1.9% (also 1.9% Q4/Q4). That’s the lower end of the range of the FOMC’s forecast. We are accordingly pushing to Q4 the timing for a Fed rate hike.

• While the Canadian economy seems to have had a nice lift in Q1 due to exports, it is not out of the woods just yet. A temporary giveback from trade and continued weakness in domestic demand will limit Q2 growth. Further ahead, an expected moderation in employment creation should have indebted households exert restraint with regards to spending on consumption goods and housing, the latter’s overall affordability currently at its worst in years. That, coupled with continuing declines in business investment should offset the benefits of upcoming fiscal stimulus. All in all, we remain comfortable with our forecasts of just 1.3% for Canada’s GDP growth this year.

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