What were the economic facts of 2011 that most people missed?


Canadian MoneyTORONTO – What were the economic facts of 2011 that most people missed? What may happen in 2012? BMO’s Deputy Chief Economist, Doug Porter, has offered up five interesting facts from 2011, and five predictions for 2012.


Canada grew faster than Brazil in the past year. Despite a series of challenges both in Canada and globally, the Canadian economy likely grew 2.3 per cent, close to expectations and not far from its long-run average. Over the latest four quarters, GDP is up 2.4 per cent year-over-year, outpacing not just most major industrialized economies (the U.S. was up 1.5 per cent and the Eurozone 1.4 per cent), but even the 2.1 per cent advance in emerging market darling Brazil over the same period.

The Canadian dollar was the weakest currency in the G10 in the past year. Global investors were not so impressed with the Canadian dollar in 2011, driving the currency down more than 2 per cent on the year. So, not only did the loonie weaken against the U.S. dollar and the disaster-hit Japanese yen (which was in fact the strongest major currency this year), but even against the beleaguered euro.

The U.S. government faced its lowest borrowing costs since the early 1950s. Despite political difficulties throughout the year, the first credit rating downgrade of U.S. government debt in history, the intense focus on deficits and debt, and 3 per cent-plus inflation, 10-year Treasury yields averaged less than 2.8 per cent in 2011 and ended the year close to all-time lows around 2 per cent.

Gold was the top-performing commodity in 2011, but also a drag on the TSX. Despite record gold, silver and copper prices at various stages this year, and the early-year sprint in oil above $100, commodity prices sagged overall in 2011. For instance, the Commodity Research Bureau Index fell more than 8 per cent, with natural gas, nickel and lumber all down more than 20 per cent (all are important commodities for Canada). Accordingly, the materials sector was the second weakest in the TSX this year (“topped” only by tech), with even gold stocks down more than 15 per cent.

Canadian inflation rose at the fastest pace in 20 years in 2011. With one month to go, it looks like the consumer price index will rise by almost 3 per cent this year, the fastest annual increase since 1991 (the year of the GST and the year the Bank of Canada began targeting inflation). This year’s increase was pumped up by sales tax increases, but even ex-tax inflation was nearly 2.5 per cent, despite a soggy economy and a lingering output gap.


The North American economy will decouple from recession in Europe. There are two distinct calls here: European GDP will contract roughly 1 per cent in 2012, after growing 1.5 per cent in 2011; and North America will partly avoid the downdraft. The most encouraging development in recent months is the ability of the U.S. economy to gather modest momentum in the face of Europe’s deepening woes. However, we continue to look for sub-par growth in both Canada and the U.S. of 2 per cent next year, keeping jobless rates little changed. Notably, the U.S. economy should grow faster than Canada for the first time in seven years.

Housing will add to U.S. growth in 2012. After declining relentlessly for six consecutive years, and dropping to a record low of barely a 2 per cent share of GDP, residential construction is finally poised to add – albeit slightly – to U.S. growth next year. Homebuilder sentiment is slowly improving, home sales are creeping off the bottom, and rising rents are spurring construction of multiple-unit buildings. In a related development, we also look for consumer spending to grow faster in the U.S. than in Canada for the second year in a row. With U.S. job growth finally catching up to Canada, and plenty of pent-up demand, there is simply more runway for U.S. consumers.

The Bank of Canada will have its longest period of inactivity since the 1950s. Given the sluggish external growth backdrop and a tapped-out domestic consumer, as well as a Fed that seems poised to lower interest rates in the next 18 months, we see the Bank of Canada on hold through 2012. In fact, there is likely more chance of a Bank of Canada rate cut than a hike in the next year. But note that the Bank of Canada was the only G10 central bank that did not take any easing steps in 2011. If the Bank of Canada does stand aside, that would leave rates on hold for at least 28 months, the longest stretch of stable Canadian interest rates since the early 1950s.

China’s trade surplus will narrow markedly. With inflation pressures finally cracking, and growth prospects in the rest of the world sagging notably, China’s policymakers took initial steps to ease monetary policy in late 2011. There should be more aggressive easing next year which, combined with a 5 per cent appreciation of the yuan in the past year and weaker demand from Europe, should help cut into the trade surplus next year.

Vancouver will not be the hottest housing market in Canada in 2012. Despite the intense focus on the city as a bubble candidate as far back as 2010, Vancouver still saw the biggest average price increases (+16 per cent) and the biggest real estate volume gains (sales & price gains combined) in Canada this year. That won’t be repeated next year – there are already clear signs that sales are dipping, and price increases are starting to ebb. Toronto has seized the mantle of hottest major market in recent months, and appears to be at some risk of overheating. Meantime, the award for most well-behaved market is a tie between Calgary and Edmonton, which have seen stable prices in recent years even as Alberta easily recorded the strongest employment growth in the country in 2011. Assuming oil prices hold around $90 or better, look for those two cities to lead the way for hottest housing markets in 2012.

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