Bay Street’s blue Christmas might usher in a happier new year

Honestly, no one knows what will happen in 2016—but Bay Street’s gloominess could signal we’ve hit a bottom of sorts

Bay Street office towers, seen looking up

Bay Street may now be overestimating economic gloom. (Gloria Nieto/Globe and Mail/CP)

’Tis the season of forecasts and festive foolishness at the economics divisions of Bay Street’s big banks. All five of the top economists at Bank of Montreal penned tributes to the Canadian and global economies that they said could be sung to the tune of a particular Christmas song. (Jennifer Lee wins on originality for “Draghi Baby,” as opposed to “Santa Baby”: It’s been sluggish all year, Draghi baby/So hurry with more QE tonight.) Warren Lovely, head of public sector research and strategy at National Bank Financial, sent a “holiday poem” to his clients called “Twas the Night Before Stimulus.” Perhaps they were inspired by Avery Shenfeld at CIBC World Markets, who a few weeks wrote a commentary that he said could be sun to the tune of Adele’s hit song “Hello.”

And why not attempt to have some fun at the end of a miserable year for the Canadian economy? There was nothing uplifting in preparing an economic outlook for 2016, a year for which the most optimistic thing that can be said is that it probably won’t be any worse than the one that is about to end. Bank of Montreal sees growth of no more than 1.8% next year, compared with 1.3% in 2015. That still would be one of the slowest rates of growth outside a recession ever. Swiss bank Credit Suisse predicts gross domestic product will expand only 1.6% in 2016 and that the Bank of Canada will be forced to cut its benchmark interest rate by a quarter point in the spring.

Before you run out to buy some more rum for the Christmas punch, read economist Ted Carmichael’s latest blog post. Carmichael (no relation) went to the trouble of reminding his peers how terrible they are at seeing the future. The consensus growth estimate for Canada this time a year ago likely will turn out to have been too optimistic by more than a percentage point. No one saw coming the Bank of Canada’s January interest-rate cut and a recession in the first half of the year. So if Bay Street is a little gloomy about the year ahead, maybe that actually is a positive sign? Bank of Canada Governor Stephen Poloz made a point in his final public appearances of the year to say that he thought the financial press was putting too much emphasis on the negatives. Poloz said he understands the disappointment with poor growth, but stated with confidence that non-energy exports had finally lifted off. Faster economic growth should follow.

Yet Carmichael’s point wasn’t to advocate a contrarian bet based on the imminent arrival of sunny days. He observed that the investors who profited most in recent years are those who maintained portfolios that were “diversified, risk-balanced, and currency unhedged.” That’s a defensive strategy, and probably a wise one. Statistics Canada reported December 23 that GDP was unchanged in October after a contraction of 0.5% in September. The September number was affected by temporary shutdowns at various refineries for repairs and maintenance. Production rebounded in October as expected. However, manufacturing and retail sales declined, offsetting the gains from oil and gas.

Most of the financial press gets too hung up on forecasts. That’s because economists’ outlooks make for easy ways to construct simple narratives; a storyteller’s version of a modular home. Economic predictions are best treated as rough guides. So what can be said about 2016? A double-dip recession is unlikely. The Goldman Sachs call that oil prices will drop to $20 (US) per barrel sounds a lot like earlier predictions that crude was destined to touch $200 per barrel. As Federal Reserve Chair Janet Yellen noted last week, most believe crude prices are near a floor; if they drop any lower, producers that have been breaking even or pumping at a moderate loss will finally give up. The collapse likely has bottomed, implying that prices only can rise.

The Credit Suisse prediction that the Bank of Canada will cut interest rates again in the spring is probably wrong. The bold assertion is based on the assumption that exports and business investment will continue to disappoint. That’s possible. CIBC economists observed last week that non-energy exports are growing much slower now than they did in the late 1990s, another period when authorities leaned on a weak dollar to boost shipments to the United States. The difference is that Canada has surrendered market share in the U.S. to countries such as China and Mexico. There’s little monetary policy can do about that, in part because it would be unwise to push the exchange rate much lower. Canada’s industrial base will be built around companies that are successful in Asia and other fast-growing regions. They need to invest in these countries and boost sales to expanding middle classes. A weak currency hurts such companies.

Housing bubbles in Toronto and Vancouver and record household debt  also remain concerns. The Bank of Canada will lower interest rates if it has to, but it will need a compelling reason to do so. Sluggish growth probably isn’t reason enough, given the risks the central bank would be courting with lower borrowing costs. And for the first time in years, monetary policy will be getting some help from fiscal policy. Prime Minister Justin Trudeau’s election promise to spend heavily on infrastructure will provide a source of demand that was lacking in 2015. To quote National Bank poet Warren Lovely: So despite some red ink and over opposition hollers/We’ll soon get a federal budget, with billions of dollars.