Canadian economists see U.S. rebound helping Canada in 2013

Fri Jan 11, 2013 2:20pm EST

* Global economy seen moderately stronger in 2013

* United States expected to lead advanced economy gains

* CIBC says stock pickers to favor growth over dividends

By Alastair Sharp

TORONTO, Jan 11 (Reuters) - A U.S. housing recovery and a broader global rebound from the second half of this year will likely prop up Canada's sluggish domestic economy, economists at Canada's largest banks said on Friday in cautiously optimistic forecasts.

The economists admitted they were troubled by signs of a slowdown in Canadian housing and by a currency widely considered overvalued. But the consensus was for gradual economic improvement as the year goes on.

"2013 is a year where the pendulum is likely to swing back towards a stronger global economy, but gradually over the course of the year, gaining momentum as we head into 2014," said Craig Alexander, chief economist at Toronto-Dominion Bank.

Perhaps surprisingly, given the current focus on U.S. fiscal brinkmanship and soft economic data, the economists mostly pointed to the situation in the United States as the source of most Canadian growth.

"Up until this point it may have seemed like the U.S. recovery has had all the vim and vigor of a slug waking up after a five-year nap, but we think that will change in 2013," said Doug Porter, deputy chief economist at BMO Capital Markets.

He expects the U.S. economy will grow faster than the Canadian one as it recovers from years of subdued activity, with a rebounding housing sector leading the charge.

"The housing recovery in the U.S. is real, it's broadening, and we think it will be a very important contributor to the U.S. economy throughout 2013 and 2014," Porter said, forecasting 2.5 percent U.S. growth and 2 percent for Canada.

Royal Bank of Canada chief economist Craig Wright expects the Canadian housing market to cool but not collapse and says North American companies will start spending hoarded cash as the economic outlook clears.

"We've seen how pessimism is reinforcing on the way down, I think optimism is reinforcing on the way up," he said.

Avery Shenfeld, chief economist at CIBC World Markets, said equities would likely have a slow start and a strong finish to 2013, with stocks from growth-oriented companies replacing dividend stocks as the best performers as markets focus on likely 2014 earnings.

"You could make the argument that equities are quite cheap, matched against 2014 earnings, particularly with bond yields this low," he said.

The most wary forecaster was Julia Coronado of BNP Paribas, who as the sole representative of a European bank was asked to speak to that continent's outlook.

"I'm surprised by all the optimism up here," she said. "The actual macro-economic fundamentals are very difficult in Europe and they're going to be difficult in 2013 ... Europe has a lot of fiscal wood to chop."

Coronado said that comments from Mario Draghi, the head of the European Central Bank, on Thursday as the bank held rates steady were "too optimistic a little too early."

"They need to stay the course and communicate a resolve to be there and be supportive of the economy as we make this difficult transition," she said.

Scotiabank's chief economist, Warren Jestin, noted that emerging markets have become important markets rather than merely producers of cheap electronics, and the Chinese are now the world's top-spending tourists.

"As the emerging markets continue to outperform the developed markets, in good years and bad years, they will become an even more powerful force in driving the global economy and financial markets," he said.

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