The BOC July Monetary Policy Report released today expresses hope that future US economic growth will rescue the Canadian economy.
"Overall, as U.S. demand growth becomes more durable and non-energy exports regain momentum, business confidence will likely strengthen and the natural sequence will reassert itself. A pickup in business investment growth should follow as firms look to increase capacity to meet stronger domestic and foreign demand. In this sequence, investment in machinery and equipment is expected to be the main source of growth in business spending, supported by robust demand in the manufacturing sector and favourable financing conditions."
I think that it is fairly telling that the dependence on the US to contribute to Canada's economic growth is not living up to expectations thus far (and as a result the bank rate has been cut).
Meanwhile, south of the border, in her testimony to Congress , Chairwoman of the US Federal Reserve, Janet Yellen, does continue to believe that "eventually" the pick-up in employment will transition to more consumer activity and stronger economic growth.
However, while we hope that all the smart minds that are putting forward these positive/upbeat forecasts are correct, we are a little skeptical (see yesterdays blog and/or the High Rock webinar for more detail, following yesterdays report on US June and May retail sales).
We believe that, at the moment, there is a structural shift happening in the nature of the consumer who is reluctant to spend: the Baby Boom cohort is saving as they head toward retirement. The Millennial cohort (now the largest) does not have the money to spend.
This may impact the outlook for US economic growth because the consumer represents approximately 2/3 of the economy.
At the moment, we do not believe that this scenario (of downside economic risk attributable to the consumer) is being considered enough (or talked about) as part of the forecast.
On a global scale, the Euro area is recovering (but slowly and the focus on Greece has not been a helpful stimulant). China is not consuming exports as they once had been (as growth slows there while they transition through structural economic changes), impacting the Australian and Canadian resource sectors.
As BOC Governor Poloz implied at his press conference this morning, the economic cross-winds are complex. He was significantly more positive in January, that the downturn would be short-lived.
For both central bankers (Poloz and Yellen), they continue to focus on a more robust economic future, but their track record is a little suspect at the moment. As governor Poloz intimated this morning when asked about his previous forecast, hindsight is 20/20.
I would suggest that behind the scenes there are greater concerns than are being discussed in the public forum, despite the image being portrayed of "greater transparency".
That's why the BOC cut the Bank Rate by 1/4%.
So our investment strategy currently incorporates a less than robust economic outlook, for the US, Canada and the global economy in general.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist