The Canadian economy may not be the rip-roaring success next year that it has been, but neither will it go into the tank. That’s the consensus of four prominent professionals whose job is to monitor the country’s financial landscape.

Their predictions for 2007 are based on such factors as inflation, interest rates and corporate earnings, as outlined below.

Kate Warne
Canadian-market specialist, principal, Edward Jones partnership, St. Louis

Ms. Warne, who is “generally bullish” on prospects for the Canadian economy next year, expects to see continued healthy economic numbers in 2007.

“We think that real economic growth is going to continue pretty much the same way it’s been for the last couple of years, in some places in the 2.5-per-cent to 3-per-cent range,” she says. “That’s pretty solid growth, I’d say.”

Ms. Warne is not quite so optimistic, however, about the prospects for the U.S. economy. She already sees evidence of a slowdown, and expects the overall growth rate to decline to about 2.5 per cent in 2007. The nominal rates of the two North American economies are comparable, she says, but are less impressive for the United States given that its “potential growth rate is a bit higher.”

Ms. Warne expects inflation to remain moderate in both countries. In Canada, she sees it hovering between 2 per cent and 2.5 per cent, slightly higher than the 2-per-cent target of the Bank of Canada but “still in a range where we expect them to be comfortable.” She forecasts a higher rate of 2.5 per cent to 3 per cent for the United States.

Because of moderate growth and tame inflation in both the Canadian and U.S. economies, Ms. Warne doesn’t expect the Bank of Canada to make any rate changes throughout 2007. Neither will the Federal Reserve, she says, especially during the first half of the year.

Corporate earnings in both countries will slow somewhat but not dramatically, she says. In Canada, she expects average earnings “in the
high single digits,” while in the United States they should be about 7 per cent, which “suggests the stock market can continue to move higher as we continue to see solid earnings growth.”

The value of the Canadian dollar will be volatile, averaging 85 or 86 cents U.S., down slightly from where it has traded this year. “We’ve seen recently [that] the Canadian dollar tends to move with oil prices. I think overall that we’re likely to see oil prices pull back a bit. “That suggests the Canadian dollar is likely to move down a bit against the U.S. dollar, but not dramatically.”

It will also be another strong year for the world economy, she says, with continued growth of 4 per cent to 5 per cent being driven largely by Asia, particularly China and India.

Don Drummond
Senior vice-president, chief economist, TD Bank Financial Group, Toronto

Mr. Drummond is “bearish” on both the Canadian and U.S. economies, which he says are already “performing in a somewhat substandard fashion” — a trend he says will continue during the first half of 2007.

Though the numbers look “weakish” for 2007, they are “certainly nothing close to a recession,” he says. The weak U.S. housing market is a key factor for both countries, he notes, because it is beginning to create “a fair bit of consumption weakness” that will not only hurt the U.S. economy but indirectly affect Canada as well.

Mr. Drummond expects sluggish growth of around 2 per cent from mid-2006 to mid-2007 before the economy picks up again in the third quarter. Quarter-by-quarter for the next year, he forecasts Canadian growth of 2.2 per cent, 2.5 per cent, 2.8 per cent and 3.2 per cent, respectively. In the United States, growth will steadily rise a half-point each quarter, from 2.0 per cent in the first quarter to 3.5 per cent by the end of 2007.

The United States will employ “stronger growth potential” — in large part because of better productivity in recent years — to pull ahead of Canada by mid-2007.

Because of slower growth, the Bank of Canada and the U.S. Federal Reserve Board will cut their respective central bank rates, Mr. Drummond predicts. The current Canadian rate, 4.25 per cent, will be reduced by 25 basis points twice in 2007, then increased by 25 near the end of the year to an even 4 per cent, he says. The Federal Reserve will cut the U.S. bank rate from its current 5.25 per cent to 4.5 per cent by the end of 2007.

The Canadian dollar will hit a low of 86 cents U.S. in the spring because of anticipated drops in key base-metal prices as well as a further drop in oil prices, Mr. Drummond believes. Then it will rebound to 89 or 90 cents as commodity prices, including oil, bounce back in a strengthening world economy during the second half of the year.

He believes the U.S. dollar will continue to soften against key world currencies. such as the euro and Japanese yen, in large part because of the U.S. current account and fiscal deficits. The core inflation rate in both Canada and the United States should hover around 2 per cent, Mr. Drummond says. On this side of the border, that represents the midpoint of the inflationary target band established by the Bank of Canada, a target level the federal government recently extended until 2011.

Pretax profits will grow by only 1.4 per cent in the United States and 1.7 per cent in Canada, Mr. Drummond predicts. But, he adds, “equity markets are already looking through that weakness for the first half of 2007.” When expectations for a strengthening during the second half of 2007 are factored in, stock markets will continue to perform well, he says.

On the world stage, Mr. Drummond foresees 4-per-cent growth in 2007, driven by Asia at 6.1 per cent. Although those numbers are higher than in North America, they are each about a point weaker compared with 2006, he points out.

Fred Sturm Executive vice-president, chief investment strategist, Mackenzie Financial Corp., Toronto

Mr. Sturm is “moderately bullish” on prospects for the Canadian and U.S. economies. They have room for “moderate but measured” corporate earnings growth and will record GDP growth in the range of about 2.5 per cent to 3 per cent.

He is slightly more bullish on the world economy, anticipating GDP growth of 3 per cent to 3.5 per cent.

Mr. Sturm expects both the Bank of Canada and Federal Reserve will reduce interest rates in 2007. In Canada, he calls for the central bank rate to drop 25 basis points to 4 per cent, with the Federal Reserve’s rate dropping 50 basis points, to 4.75 per cent.

Inflation, Mr. Sturm anticipates, will be relatively muted and probably “slightly lower by the end of next year” than it is today in both countries, thanks to a “generally moderating housing market, reduced commodity prices and generally lower interest rates that have helped to reduce financing costs.”

Mr. Sturm expects the Canadian dollar to average about 89 cents U.S. but range roughly from 86 to 92 cents, a spread similar to 2006. “We don’t think [currency fluctuation] is going to be a material issue.”

Corporate earnings in both Canada and the U.S. will range from about 5 per cent to 10 per cent, he says. However, the picture won’t be all rosy. He predicts, for example, that “the rate of growth for the resources sector will come down substantially because we don’t believe commodity prices are going to rise much next year.”

Mr. Sturm expects the value of the U.S. dollar to continue to fall as part of a “persistent downtrend” triggered by ongoing trade imbalances. Globally, he foresees no acceleration in the economic growth rate until 2008, but stresses that “we’re squarely in a slowdown,” not a recession.

“Barring evidence of some other major interruption, many would call this a mid-cycle slowdown,” Mr. Sturm says. “Typically, in an extended economic expansion, as we saw in the ’80s and ’90s, you have a burst of economic activity when you’re coming out of recession; then after that, if it’s going to be an extended business cycle, you have a slowdown before you reaccelerate. And that’s what we’re expecting.”

Sherry Cooper Chief economist, BMO Nesbitt Burns, Toronto

Ms. Cooper, too, is “moderately bullish” on Canadian, U.S. and world economic prospects for 2007.

In Canada, GDP growth will fall, says Ms. Cooper, who is forecasting an average rate of 2.4 per cent for 2007. Growth will “trend higher throughout the year” with the 1.7-per-cent expansion in the third quarter of 2006 being “the lowest we’re going to see for some time.” Nor is she expecting any “harbingers of recession any time soon” in the United States, either during 2007, when its economy expands by a predicted 2.6 per cent, or in 2008.

Ms. Cooper predicts that core inflation — which eliminates factors from the consumer price index that can cause price volatility, such as energy or food items — will hover close to the Bank of Canada’s target band of 2 per cent in 2007, down slightly from today. The comparable U.S. inflation figure will be 2.5 per cent. That slightly higher inflation rate in the U.S. relative to Canada is caused by several factors, the largest one being rising labour costs, she points out.

The Bank of Canada and Federal Reserve will ease interest rates in 2007, she predicts. The Bank of Canada will shave 25 basis points to settle at an even 4 per cent in the second quarter, she says, while the Federal Reserve will drop rates by 50 basis points, beginning with a quarter-point dip in the second quarter, followed by another quarter-point drop in the third quarter to end 2007 at 4.75 per cent.

Ms. Cooper says the Canadian dollar peaked in May 2006 at just above 91 cents and will continue to edge downward in 2007, trading “in a relatively narrow range” on a quarterly average basis at 86.5 to 87.5 cents U.S.

The Canadian dollar has fallen in 2006 because “it was at a level that made Canada quite uncompetitive in manufacturing,” she says. Moreover, the conditions exist for a further decline in 2007 because “since that time, we’ve seen a slowdown in the United States, and net exports in Canada have diminished.” Another factor tugging on the Canadian dollar is that interest rates here “are dramatically below those of the U.S.”

Ms. Cooper expects continued weakness in the U.S. dollar and a gradual drop, after rising during the first quarter of 2007, to end the year at about $1.28 against the euro. The fall will be exacerbated by such factors as the European Central Bank raising rates in the face of accelerating economic conditions, “whereas the Federal Reserve’s next move is likely to be cutting rates” to deal with a slowing U.S. economy, she says.

Pre-tax corporate earnings of TSX companies will increase by about 7 per cent in 2006, Ms. Cooper predicts, compared with almost 22 per cent in 2006. One reason: “We’re not likely to see the surge in commodities — particularly oil — that we had in the past.” The story will be similar with the Dow Jones Industrial Average, she says. Growth will be “not nearly as strong as the current year, but still positive.” In contrast to North America, the world economy will increase by a more robust 4.6 per cent, she predicts.

Special to The Globe and Mail