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The new economic tempo: slow and low

By Andrew Rickard | July 13 2015 01:47PM

The Bank of Canada surprised markets in January when it lowered the overnight rate to 0.75%, where it has remained. Is this the new norm? Avery Shenfeld, chief economist at CIBC World Markets, says that while interest rates may slowly begin to rise by the end of next year, investors should prepare for an era of low growth and a low Canadian dollar.Speaking at the Chartered Financial Analyst Society of Toronto’s annual pension conference on April 16, Avery Shenfeld explained why he believes that the global economy has entered a period of low growth and correspondingly low interest rates.

“Part of the problem is that growth is slowing in developing countries,” he says. The economies of the so-called BRIC countries, namely Brazil, Russia, India and China, are not booming as they once were. “The BRICs have landed like bricks,” quips Shenfeld. With the Greek debt crisis and an unemployment rate of about 12%, he says that the Eurozone is acting as drag on the global economy as well.

Only the United States has shown marked signs of improvement, particularly in housing. “Part of the recession was that the typical demographic wasn’t buying houses. The 25 to 34 year olds were living comfortably at home because they had school debt and bad jobs,” he notes. “Finally, much to the relief of their parents, they are starting to move out.” While this means that the US Federal Reserve may be in a position to hike interest rates this year, Shenfeld doesn’t believe that will be the case at home.

“The Bank of Canada has to temper its interest rate increases and gage the pace so that they do not push the Canadian dollar back to parity,” he says. In order for Canada to remain competitive and lure back manufacturers, Shenfeld believes the loonie needs to remain around 80 cents US. He also points out that Canadian consumers are carrying high levels of debt, and that has implications for how far and how quickly the Bank of Canada can move. This being the case, he thinks it unlikely that Bank of Canada Governor Stephen Poloz will begin to increase rates until late 2016.

Shenfeld wrapped up by noting that Canada’s annual gross domestic product (GDP) grew about 3% annually during the 1980s. This year, CIBC is forecasting a real GDP growth rate of 1.7%. “In the same way that people say age 50 is the new 30, 2% is the new 3%,” he concluded. “There’s a new normal for growth in the world, and it’s slower, and there’s a new normal for interest rates, and they’re lower.”

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