The US economy is starting to feel the brunt of the dollar's surge

Highlights

• The global economy is set for another difficult year. Economies, particularly in emerging markets, will continue to adjust to the challenges brought by China’s rebalancing, resulting in slower growth. In the advanced world too, growth won’t be spectacular, with ongoing struggles in the Eurozone and Japan, and a likely deceleration in the US courtesy of a surging dollar. The greenback’s surge has also raised the odds of world corporate debt turning sour. The sizable amount of USD-denominated debt issued outside of the US has indeed become harder to service after the greenback’s historic surge. On a positive note, however, low oil prices will help keep inflation low, allowing central banks in most major economies to assist growth by keeping monetary policy highly stimulative. All in all, 2016 GDP growth is unlikely to be much better than last year.

• The US economy is starting to feel the brunt of the dollar’s surge. Exports are declining and that’s leading to bloated inventories and production cutbacks by factories. The persistence of USD strength had us trim our 2016 growth forecast to 2.0%. While trade will continue to act as a drag on the economy, domestic demand will again contribute thanks largely to consumers, although not to the same extent as before. Indeed, employment growth is set to moderate from the red hot pace of the last couple of years, while the benefits of low pump prices will also fade for consumers. With slower growth than it had expected and inflation capped by USD strength, the Fed won’t be in a hurry to tighten monetary policy.

• The persistence of low oil prices means the worst may not be over for Canada. Lower projections for oil prices should lead to further cuts to investment spending and hurt growth. We have accordingly downgraded our 2016 growth forecast to just 0.9%. With monetary policy becoming less effective, the federal government can play a more significant role to support the economy. However, we’ll need to see a more forceful and timely fiscal policy response in the upcoming federal budget than what was promised during the election campaign to paper over oilinduced weakness and put off the broader stall in Canadian growth we now fear. Failing an added fiscal boost, the onus for supporting growth would once again fall squarely back to the Bank of Canada.

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