The US economy is bouncing back nicely

Highlights

• The commodity slump is no accident. It’s a reflection of weak global growth, something that’s all the more concerning considering monetary policy remains highly stimulative worldwide. China’s rebalancing act is proving to be painful and weighing enough on its economy as to prompt a mini U-turn from Beijing via an unexpected loosening of the currency peg. Following the yuan’s devaluation, other emerging economies also saw their currencies sink. Whether the latter was intentional (via central bank action) or not (capital flight) is moot. The US dollar continues to appreciate and that presents downside risks for the world economy given the massive amounts of USD-denominated debt particularly in emerging markets. World GDP growth should be no better than 3.2% this year, the worst performance since 2009.

• After a difficult start to the year, the US economy is bouncing back nicely. Upward revisions to the first quarter, and probably Q2 as well, put the world’s largest economy on track to grow roughly 2.5% this year. Such above-potential rate of growth and the continued strength in employment get us ever closer to a first interest rate hike by the Fed in almost a decade. That, however, assumes financial markets stabilize and Congress doesn’t torpedo the economy again via a potential shutdown of government in the Fall.

• While it’s too early to conclude that the Canadian economy is in a recession, it’s safe to say that the narrative isn’t positive. The energy sector continues to adjust to the oil shock, and there’s evidence of some spillover to the rest of the economy. The labour market’s resilience is welcome news but things could change quickly for the worse if growth doesn’t pick up in the second half of the year. There is downside potential even to our recently downgraded forecast for GDP growth for 2015. The investment collapse is far from over and not much can be expected from housing and consumption after the prior years’ heroics. That leaves trade as the best hope for the economy. The cheap loonie and the US resurgence give reason to be hopeful that Canada will avoid an outright recession. Still, if we’re correct about the extent of the investment slump that would equate not only to weak growth this year but also to lower potential growth for 2016 and beyond. That explains why our GDP growth forecast for next year has been lowered to just 1.6%.