US economy is now bouncing back

Highlights

• The global economy is set for a challenging second half of the year. Markets are already starting to position themselves for the first tightening of Fed monetary policy in nine years, with the resulting surging greenback pressuring USD borrowers outside America. In Europe, the Greek situation is concerning more so after Athens made clear it cannot meet its debt repayment obligations. So, there will be either a bailout or a default, the latter opening the door for Greece to leave the Eurozone. Our call for the world economy to grow roughly 3.5% this year and next assumes those downside risks are contained.

• After a difficult start to the year, the US economy is now bouncing back. While trade will remain under pressure from the strong dollar, domestic demand should strengthen enough to boost overall growth. Indeed, fundamentals are excellent for the driving force of the US economy, namely consumers, thanks to a strong labour market, low pump prices, and high confidence. The pressure to improve productivity amidst a strengthening currency will also fuel business investment spending. We continue to expect the world’s largest economy to register above-potential growth of around 2.6% this year and next.

• The poor start to the year prompted a downgrade to our Canadian GDP growth forecast for 2015 to just 1.6%. The bad news is that the main driver of Q1 weakness namely business investment could persist for a while as the impacts of the oil shock continues to be felt particularly in the energy patch. More encouraging, however, is that part of the Q1 slump was due to temporary factors that will reverse in subsequent quarters. Consumption spending, for instance, which was hindered by atypically bad weather should bounce back, helped by a resilient labour market. Exports should also perform better in synch with a resurgent US economy.