Canadian forecaster expects US-led recovery

TORONTO: Canada's economy will sputter until at least mid-year on cheap oil and stretched urban real estate markets but should pick up later in the year provided the United States does, according to the most accurate forecaster on the economy in Reuters polls in 2015.

The U.S. economy will strengthen and boost demand for Canadian exports, spurred on by a weaker currency, said James Blumenthal, chief Canada market analyst at Informa Global Markets, who topped the Reuters economic accuracy league for 2015, compiled by StarMine.

"A strengthening U.S. economy is the key to Canadian growth," he said. "(It) would be a positive for Canadian exports as it would mean increased demand."

That is also something on which Bank of Canada Governor Stephen Poloz has long pinned his hopes for an economic turnaround.

However, in the near-term, a small risk of another recession can not be ruled out, Blumenthal said.

The price of oil, a major Canadian export, has fallen more than 70 percent since mid-2014 due to a rundown of inventory and weak global demand, and likely brought the economy to a halt in the fourth quarter.

This, along with the first policy tightening in the U.S. in nearly a decade, sent the Canadian dollar on its longest downward spiral on record last month to a 13-year low.

That was one of the reasons why Canada's central bank left its benchmark interest rate on hold at 0.50 percent on Jan. 20, despite the economic slowdown.

The Bank of Canada's Poloz downgraded his growth forecast for 2016 to 1.4 percent from 2.0 percent in October. Blumenthal says those forecasts are slightly optimistic.

"We are still looking for the economy to pick up as we go further into 2016. But it may be a bit slower than the Bank is looking for at this point. They have been too optimistic in the past."  Blumenthal predicts growth of around 1.3 percent this year and says the Bank will to stay on hold on interest rates until the third quarter of 2017. He forecasts inflation to still be below the Bank's 2 percent target then.  Any more rate reductions could add fuel to Canada's record-high household debt load and push up house prices in the already stretched housing markets of Toronto and Vancouver, said Blumenthal.  Years of low borrowing costs have already nearly doubled house prices over the past decade and sent the household debt-to-income ratio to a record high, eliciting warnings of a crash from many analysts.