While the global economy is experiencing modest growth, risks continue to loom on the horizon, says Sonya Gulati, senior economist, at Toronto-based TD Economics, a unit of TD Bank Group. “We’re seeing better contributions from advanced economies and emerging markets,” says Gulati, noting that growth in China, a major contributor to the global economy, appears to be stabilizing at around 7.5% a year. “But the sovereign debt crisis in Europe and the fiscal situation in the U.S. continue to be on our radar.”
Although there is a lot of positive momentum in the U.S. economy, Gulati argues that the debt ceiling debate and fiscal negotiations over the U.S. budget could come up again early in 2014. “The economic fundamentals are quite positive. But you also have uncertainty in the equation. We could have a repeat of the congressional wrangling we had last October.”
At home, Canada’s economy grew 1.7% in 2013, but is expected to climb to 2.4% in 2014 and 2.6% in 2015. The improvement is due to the acceleration in the U.S. and improvements in the Eurozone. “After six consecutive (negative) quarters, the Eurozone looks to be out of recession and should see positive growth numbers in 2014 and 2015,” says Gulati, adding that the forecast is around 1% growth next year. “Add growth from the U.S., and that’s good news from a global demand perspective.”
Ontario will track the national growth rate, as the province is expected to grow 1.5% in 2013, 2.3% in 2014 and 2.7% in 2015. Meanwhile, inflation is likely to be muted, at less than 2% for the next two years, says Gulati. One key contributing factor is that the retail sector has little pricing power because of intensified competition from new U.S. entrants. In addition, energy prices are likely to be held in check as demand stabilizes in major importing markets such as China.
The possibility of rising interest rates, which did not materialize in 2013 as anticipated, is likely to be pushed into the future. “It is going to be a 2015 story,” suggests Gulati. “Canada is very sensitive to developments abroad, especially through our export channels. If we were to raise interest rates today that would dampen our domestic economy, at a time when the export part of our economy is not expected to pick up.” At the same time, adds Gulati, policymakers are wary of raising rates because it would push up the Canadian dollar and thus damage our competitiveness.
Meanwhile, employment is expected to grow and unemployment, on a national basis, will fall from 7.2% at end of 2013 to 6.7% by the end of 2014.
While the provincial economy will improve as a whole, the picture for the home building sector—low interest rates aside—is not as rosy. Gulati forecasts that there will about 59,600 housing starts in 2013, 57,000 in 2014 and 52,000 in 2015. This compares to 78,600 in 2012. “Keep in mind that 2012 was a record year,” Gulati notes.
Part of the decline is the predictable side effect of the large amount of supply that came on the market in 2012. “You can’t expect spectacular years back-to-back. There are also a lot of condo projects being built in Ontario. And we had tighter mortgage rules come into effect in July 2012,” says Gulati, noting that new federal laws limited mortgages to a maximum of 25 years amortization.
Rising interest rates are expected to be a dampening influence come late 2015, as the Bank of Canada may raise the so-called overnight rate from 1% to 1.5%, putting pressure on mortgage rates. The decision to hold off until then has regrettably only boosted resale activity thus far, says Gulati, who expects resale home prices in Ontario to show a 5% increase in 2013, pushing the average home price to slightly over $400,000. Says Gulati: “Because they didn’t raise interest rates, that translated into higher home prices.” However, she predicts the rate of increase will fall to about 2.3% in 2014 as the average price hits $409,000. Prices are expected to be flat in 2015.
“There continue to be positive influences on the housing market—both existing and new,” says Gulati. “Weakness in the market will be a medium-term story, once those higher interest rates come into place.”