Modest Growth for Economy in the Short Term

Financial experts anticipate slow and steady gains over the next few years

Written by Melissa Campeau

Canada’s economy seems to be in an extremely slow and steady groove. A new Towers Watson survey of business economists, strategists and portfolio managers from 169 organizations predicts modest growth for Canada, continued below-trend interest rates, moderate levels of inflation and average equity market returns over the next few years.

Looking into the near future, experts have muted growth expectations for Canada. But for the longer term, those surveyed expect above-average growth at 2.5%. Long-term growth expectations for the U.S. are also at 2.5%, which is well below its historical average of 3.25%, reflecting continuing concerns over the magnitude of the U.S. deficit.

In early 2012, survey respondents predicted that the Bank of Canada overnight rate (the rate at which banks borrow and lend one-day funds among themselves) would increase to 2.5% between 2013 and 2016. This year respondents are expecting the overnight rate to rise to only 2% between 2014 and 2017 and inflation to remain controlled at 2%.

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Respondents also forecast the Canadian dollar to remain near parity with the U.S. dollar over the next 15 years, although 25% of respondents predict the Canadian dollar could reach $1.05 U.S. over the long term. “We were initially surprised to see a convergence of expectations for Canadian and U.S. economic indicators,” says Janet Rabovsky, a senior consultant in Towers Watson’s Investment Practice. “Growth predictions may reflect recent studies that suggest the output gap between Canada and the U.S. has been overstated in the past, but could simply be a reaction to the relative magnitude of government deficits.”

When it comes to defined benefit pension plans €“ plans that promise a guaranteed level of pension for the retiree’s lifetime €“ the study suggests they will continue to face both the challenges of lower than average long-term interest rates and volatile equity markets in the near term. As markets evolve, sponsors of pension plans and endowments are starting to explore ways to use traditional tools in non-traditional ways.

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“Led by some of the larger, more sophisticated plans, Canadian pension funds are accelerating a trend toward alternative assets such as real estate, infrastructure and agriculture,” says David Service, director of investment consulting services at Towers Watson. “It appears we are likely to be stuck with low interest rates and modest equity returns for the next few years, so plan sponsors need to explore all alternatives for managing risk.”

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