Economists spell out Canada?s best- and worst-case scenarios for 2012

The Canadian economy went on a roller-coaster ride in 2011: The year began with a bang, but momentum wobbled in the second half. So what?s in store for 2012? Most economists see slow growth, with an average forecast of 2 per cent for the year. But opinions are split on how it will play out.

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THE BEAR: Beata Caranci, deputy chief economist (U.S. and international), Toronto-Dominion Bank

1. You see the economy growing about 1.7 per cent this year. What will drive this growth ? or hold it back?

We expect further deterioration in financial conditions in early 2012 alongside a deep recession taking root in Europe. ? Because much of Canada?s performance is dependent on global events, the knock-on effects will scar growth by weighing down consumer and business confidence, and by resulting in softer exports and commodity prices.

2. Where do you see the currency?

If European turmoil intensifies, investors will flee to the safety of the U.S. dollar, [to the detriment of] the Canadian dollar, which would likely slip to roughly 90 cents (U.S.) in the first half of the year.

3. Canada?s jobless rate is 7.4 per cent. How will the labour market fare in 2012?

Canadians probably have to brace for an unemployment rate that is likely to go up in 2012 ? in the 7.5 to 7.7-per-cent range.

4. The Bank of Canada held the line on interest rates in 2011. What will happen this year?

2012 will be marked by more of the same when it comes to the Bank?s overnight interest rate. The uncertainty and financial market turbulence created by Europe coupled with a slowdown in the broader global economy is not an environment that will be conducive to higher rates in Canada. And, against this backdrop, inflationary pressures should ease in the coming year, facilitating the decision to leave rates unchanged at ultra-low levels.

5. Inflation got a little hotter this year. What?s your outlook in 2012?

Much of the momentum in inflation this year can be attributed to the runup in energy and food prices, which likely also seeped into the prices of other goods and services. But, commodity prices have eased in recent months ? given the prospect for weaker economic growth and a rise in the unemployment rate, we think inflation will hold below 2 per cent next year.

6. Consumers remain heavily indebted. What?s in store for them?

The prognosis is not good for 2012. ? Soft job creation will equal stagnant wages, and asset growth will be constrained by ongoing equity market volatility, low interest rates and cooling home prices. ? debt levels relative to incomes will hit new highs in 2012. As debt burdens keep rising, [consumer spending] will show pretty shallow growth of 1.6 per cent.

7. In the global economy, where will be the strongest and weakest pockets of growth?

Looking at advanced economies, without question, the weakest pocket will be the euro zone, which we think will contract by roughly 1.2 per cent. Both [the U.S. and Canada] are expected to post real GDP growth just shy of 2 per cent.

Among the emerging market economies, all seem to be gearing down, but some more so than others. We think the Asian NICs [newly industrialized countries], Brazil and perhaps even India will slow down to a lesser extent than China.

8. What are the greatest risks next year to the Canadian and global economy?

The greatest risk to Canada and the global economy are one and the same ? a misstep by European policy leaders that results in a global financial crisis.

9. What are you planning on reading over the holidays?

I?m doing a right-brain, left-brain thing. I?m reading Boomerang and The Girl Who Played with Fire ? I?ll let you know which one kept me up at night.

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THE BULL: Dawn Desjardins, assistant chief economist, Royal Bank of Canada

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