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Canada economy chugs along; loonie to fly

Jennifer Kwan

Canadians take heart: decent domestic data should insulate the country from global economic turbulence including major worries about the U.S. fiscal cliff and Europe's debt troubles, but be prepared for some groggy economic times ahead, according to one of the country's big banks.

On a global scale, sluggish growth and ongoing fiscal drag will temper job creation, confidence levels and spending trends, particularly in Europe, Scotiabank said on Wednesday at its 2013-2014 outlook conference.

But relatively robust growth in China and a number of other emerging markets -- marking the ongoing shift in the reliance of these economies -- will provide important support to the global economy, particularly trade flows and commodity markets.

"We are not in a normal situation in terms of the growth outlook. The new normal, in general, is slower growth," said Warren Jestin, Scotiabank's chief economist. Scotia sees Canada's growth at 1.7 per cent in 2013 and 2.3 per cent the year after. Comparatively, the U.S. is expected to grow 2.0 percent and 2.5 per cent, respectively.

The International Monetary Fund has said Canada's economy would grow 1.9 per cent this year and 2.0 per cent in 2013.

Relatively healthy employment and consumer spending data is helping to keep Canada's economy afloat, even as factors such as the U.S. fiscal cliff and instability pose the greatest threats. A key boost to Canada may come from China, which is expected to notch growth of around 8 per cent. Commodity markets will likely not set new highs, but remain profitable. As a result, overall investment will continue and that is "very, very constructive" for Canada.

Canada's benchmark S&P/TSX composite index is expected to see better days after extreme underperformance against the U.S. market. Vincent Delisle, an investment strategist with the bank, said the first half of 2013 should see "pro-growth" conditions. That could mean the TSX will modestly outperform the S&P 500 for the beginning part of the year, but the U.S. stock market is expected to gain further traction later in the year.

Loonie set to strengthen

The Canadian dollar is expected to remain lofty and close out 2012, 2013 and 2014 above parity with the greenback, helped higher by differences in monetary policy between central banks in the U.S. and Canada, said Camilla Sutton, the bank's chief currency strategist.

The U.S. Federal Reserve is expected to engage in so-called quantitative easing, or asset-buying program in a bid to jolt the economy, pushing down the U.S. dollar. On the other hand, Canada's central bank is sticking to its vaguely hawkish stance that typically supports the Canadian currency. "The Bank of Canada, whether you view them as being hawkish or neutral,  has far more hawkish terminology and is far more likely to hike rates well, well, well before the Fed. I think those two juxtaposed against each other creates a real reason why Canada should rally," she said.

Sutton said the Canadian currency is expected to close out 2012 at US$1.03. At end 2013-14 the currency is expected to be at US$1.04 and US$1.06, respectively.

Canada "too boring" for Mark Carney?

The bank doesn't see monetary policy changing anytime soon as inflation remains at low levels and growth tepid. The Bank of Canada on Tuesday held rates steady at 1 per cent and continued to signal rates will likely go up, not down, on the assumption that domestic growth will pick up after recent weakness.

Jestin, in a light-hearted, passing commentary, said a possible reason why Bank of Canada Governor Mark Carney recently resigned to become head of Bank of England next summer is because he simply got bored.

"I would say in terms of Governor Carney's decision to take on a new challenge, part of the problem may well be monetary policy in this country is just too boring," said Jestin.

"We've been hitting inflationary targets for 20 years, we have a banking system that has remained robust. In the UK of course some of the banking system has been nationalized and his new job involves regulation of these institutions and the challenges that exist in Europe."