ECONOMIC COMMENT - “Fasten Your Seatbelt”
Our optimism at the beginning of the first quarter was confirmed as the securities markets produced solid gains. The TSX Composite with dividends increased 4.5%, a nice recovery from calendar year end 2015 of -8.3%. The S&P 500 was up 1.4% but in Canadian dollar terms, it was down -4.9%. The Canadian dollar increased from $0.72 US to $0.77 US during the quarter. Furthermore, the Canadian bond market did well increasing 1.4% for the quarter while 91 day T-bills rose 0.13%.
The key driver of the Canadian stock market was the increase in the price of oil. West Texas Intermediate (WTI) began the year at $37.04 US per barrel and was $38.34 US per barrel on March 31st. While this increase is not that large, the volatility during the quarter was hair raising! WTI saw a low of $27.21 on February 2nd, and a high of $41.45 on March 22. The question remains, have we seen the low in oil prices and are we seeing some stabilization in the price?
There has been some talk among major producing countries to freeze oil production at the current level. If this does come to pass, the Canadian economy is in line for a major boost. Currently, economists are forecasting Canadian GDP growth at 1.0% to 1.5% for 2016 and 2017. However, oil at $60 per barrel and the fiscal stimulus from the Federal government could push 2017 over 2%.
In the US, economic growth is projected to be in a range of 2.2 to 2.6% for 2016 and likely 2017. The unemployment rate continues to decline (4.8% last reading) which suggests strengthening of the all-important consumer whose spending represents two thirds of GDP. A stronger U.S. economy along with a low Canadian dollar is helping our exports of manufactured goods.
Like Canada and the U.S., economic growth is expected to remain modest by historical standards for the global economy as well. The April forecast by the International Monetary Fund was 3.2% in 2016 and 3.5% in 2017. Improvement in the depressed Russian and Brazilian economies during this time-frame is a key assumption. Growth in the EU is expected to remain stable near 1.5% while Japan could see further softness. Both regions are being hurt by poor demographics as well as high debt loads. China’s growth is projected to slow to 6.2% by 2017 from 6.9% in 2015 as it continues the transition from an export/investment driven economy to one where consumer spending is the largest source of growth. In the latest five year plan, steps were outlined to deal with many of the issues holding back this transition including an improved safety net so consumers don’t have to save as much of their incomes as well as increased access to education and social services for the rural population. China, the EU and Japan are all supporting their economies with highly stimulative monetary policies.
Turning to North American interest rates, the Federal Reserve shifted gears on March 16th, by indicating they will continue to raise the Fed Funds rate but a slower pace. The volatility of the international economy and politics has raised their concern and caused this change. In Canada, we do not expect the Bank of Canada to reduce the bank rate in 2016. The dollar is already low and consumer debt is high. We believe the Government of Canada 10 year bond yield will trade in a range of 1.2% to 1.7% for the balance of the year. Depending on what sector you have invested in, the forecast for bond returns ranges from 0.7% to 2.5%.
While our forecasts for investment returns are positive, we expect more periods of volatility between now and year end. We have a US general election in November and a referendum in the UK in May about remaining in the European Union. Keep your seat belt on!