Toronto Gold Bullion Newsletter Archive - Daily FX report dated 25/01/2011

The International Monetary Fund boosted its growth outlook on Tuesday for the global economy this year on the heels of strengthening U.S. consumer demand and robust emerging markets although it warns financial stability “is still not assured” given heightened risks over government debt in Europe.

The forecast for Canada, however, was less upbeat. The IMF ratcheted downward the outlook for Canadian GDP growth in 2011 by 0.40 percentage points, to 2.3%, the single biggest downgrade for an individual country. However, Canada is still expected to be the second-fastest growing economy among industrialized countries, trailing the United States, with 3% expansion, but surpassing output in Germany, France and Britain.

Overall, the IMF said the global economy is set to expand 4.4% in 2011, a slight upgrade from its 4.2% expectation in the fall, mostly due to a sharp upgrade to its U.S. outlook, to 3% from 2.3%.

John Lipsky, first deputy managing director for the IMF, said the growth was “impressive” given the 10-20 year averages for global growth were about 3.5%, but added much was due to emerging markets.

“Emerging economies have represented the driving force of the post-crisis global expansion: strong domestic demand — buoyed by an accommodative policy stance and renewed inflows of foreign capital — has powered a very robust recovery, even providing some boost to advanced economies,” Mr. Lipsky said Monday at the OECD’s Latin American Forum in Paris, before the report was released.

The Washington-based organization also warned countries need to look beyond extraordinary fiscal policy and rock-bottom interest rates to boost growth, and that means addressing structural problems in respective economies – from high levels of public debt to enacting financial system reform.

The latest update to the IMF outlook acknowledges the global economy performed better than it previously expected in its fall report, owing to stronger consumption in the United States and Japan.

“Signs are increasing that private consumption — which fell sharply during the crisis — is starting to gain a foothold in major advanced economies” the IMF said in a summary, provided to journalists prior to its official release early Tuesday morning.

The update emerges as policy makers and business leaders gather in Davos, Switzerland for the annual World Economic Forum, in which delegates will hear about how the global economy is entering a “super cycle” of historically high growth.

Furthermore, the Federal Reserve begins two days of meetings Tuesday, with a rate statement to be delivered Wednesday that analysts suggest will provide a more upbeat view about the U.S. recovery — although remain cautious given high unemployment and reiterate plans to fully execute its US$600-billion asset-purchase plan. The United States is set to release Friday an early estimate of fourth-quarter GDP growth, with analysts expecting a 3.5% annualized gain for the October-to-December period.

“The U.S. economy continues to generate solid economic growth,” said economists at Wells Fargo Securities, adding data for retail sales and industrial production are suggesting a “consumer that is spending a little more readily and a manufacturing sector that is being re-energized by growing-end demand.”

The increased optimism stems from a new fiscal package Congress approved in late 2010 which extends the Bush-era tax cuts for another two years and provides a cut in payroll taxes.

For Canada, growth is set to hit 2.3% in 2011, or just below the Bank of Canada’s recent call for a 2.4% advance. Central bank governor Mark Carney warned last week Canada won’t “fully benefit” from the rebound in U.S. growth due to the high loonie and tepid productivity growth. Meanwhile, in 2012, the Canadian economy is seen picking up speed, advancing 2.7%, matching the U.S. performance.

As a whole, the IMF said advanced economies are expected to do slightly better this year, with expansion of 2.5%. Emerging economies will continue to be the global economy’s growth engine, with an expected 6.5% advance in 2011.

The big risk to the outlook is the situation in Europe, where sovereign debt risks “have on balance intensified” and spilled over.

Among the most pressing needs to ensure a robust recovery, the IMF added, is a solution to “alleviate financial stress in the euro area and to push forward with needed repairs and reforms of the financial system.

“Comprehensive, rapid and decisive policy actions are required to address downside risks,” it said, echoing comments from Mr. Carney last week.

" The major theme here is that Canadian underlying inflation trends are still quite muted".....

The jump in the annual rate is due to both higher gas prices and the fact that the December measure is compared to a soft month a year earlier, when retailers were discounting in the Christmas selling period. The introduction of the harmonized sales tax in B.C. and Ontario has also, overall, boosted price readings by 0.7 of a percentage point.

Factor out gas prices and the HST, said BMO Nesbitt Burns economist Sal Guatieri, and the inflation rate is “remarkably low.”

"The major theme here is that Canadian underlying inflation trends are still quite muted, especially in the face of heavy increases in gasoline prices, the lingering impact of the HST and the global upswing in food costs," added Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

"While these factors are likely to keep average inflation a bit above 2 per cent in 2011, core inflation looks set to remain comfortably docile around current trends through much of the year. It’s unlikely that anyone will change their forecast on the Bank of Canada outlook on this CPI result, but it does strengthen the case that the bank can take its time before hiking rates again."

The core reading, which guides the Bank of Canada even though it targets a 2-per-cent level in overall inflation, continues to suggest there is no pressure on central bank chief Mark Carney to raise interest rates any time soon. The core rate is his operational target, and, the Bank of Canada said last week, it expects this measure to climb back to 2 per cent by the end of 2012.

While the core measure is often the focus of inflation readings, because it guides interest rates, sometimes we forget that consumers still have to drive and taxes. Core prices represent 83 per cent of the total.

The outlook for inflation is also tame, though the run-up in global food prices is expected to catch up in Canada.

"Much like we are seeing on the international scale, rising agricultural commodity prices are likely to feed into higher grocery bills for Canadians in the coming months," said economist Diana Petramala of Toronto-Dominion Bank. "Nonetheless, outside of food, inflation pressures will remain under wraps."

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