More than meets the eye: Political risks and headwinds spark anxiety in environment of slowing economic growth

Key findings:

• Canadian economic pace is subpar but set to accelerate: The Canadian economy is expected to slow to 1.4 per cent this year before accelerating modestly to 1.7 per cent next year. This pace should be enough to keep the Bank of Canada on the sidelines and the loonie in the low- to mid-70 U.S. cent range. 
• Political risks and headwinds are sparking anxiety about a recession: Expectations of trade conflicts stemming from the U.S. administration’s willingness to renegotiate trade policy, the prolonged Brexit process, and aging U.S. expansion have sparked anxiety about a recession, and prompted central banks to reiterate their commitment to nurture economic growth and ease monetary policy if necessary. 
• International bodies revising global forecasts: The recent intensification of protectionism headwinds has led the International Monetary Fund, World Bank, and Organization for Economic Co-operation and Development to shave 0.2 to 0.3 percentage points off their global growth forecasts. 
• Global economic backdrop is not as gloomy as it appears: While there is little doubt the global economy has entered a period of slower growth, the slowdown remains largely confined to the industrial sector.

Toronto, July 25, 2019 – In its latest economic outlook, More than meets the eye, Deloitte Economic Advisory examines the latest market trends, political tensions, and risks that are affecting sentiment and global growth forecasts. While anxiety is present due to the escalation of downside risks and unpredictable trade and political disputes, the negative market sentiment appears excessive and does not fully agree with economic data.

The recent intensification of political risks, including the erratic Brexit process and ongoing trade tensions between the U.S. and its largest trade partners, have become insidious headwinds to global growth and unnerved financial markets. Growing financial market anxiety, already made tense by the aging U.S. recovery, has led to an inversion of the yield curve in the United States and Canada. Typically a harbinger of recession, the recessionary sentiment of the bond market is somewhat at odds with the expectation of rising profits embedded in near-record equity prices.

“With the recent escalation of political risks and the rise of certain economic headwinds, the market sentiment and growing anxiety is understandable, but it should not paralyze businesses,” says Craig Alexander, Chief Economist, Deloitte Canada. “It’s important to realize we’re in the latter stages of the business cycle, which makes economies more vulnerable, but also signals a return to more sustainable growth. While risks are present, and may be difficult to anticipate, they should not dissuade businesses from staying informed and planning ahead.”

As forecast in our last quarterly outlook in April, global economic growth has continued to decelerate, reflecting a return to a more sustainable pace after a growth spurt in many advanced economies. Deloitte Economic Advisory therefore remains of the view that Canada is in a period of continued, albeit modest, economic growth.

Download Deloitte Economic Advisory’s July 2019 economic outlook.
 

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