Economic Outlook Winter 2012: National Bank of Canada

• It has been a difficult year for the global economy. We see continuing deceleration in 2012. The crisis of public finances in the euro zone has undercut the economy of the region: the fiscal austerity forced on virtually all of its governments has madea recession practically inevitable. Despite an anticipated rebound in the U.S., the advanced economies as a group are likely to grow less in 2012 than in any of the last 30 years outside the recent recession. The emerging economies, however, with their ever-growingweight in the world, can be expected to pull global growth to 3.4% in 2012.

• It is now clear that the U.S. economy not just avoided recession in 2011 but in fact accelerated as the year progressed. GDP in Q4 is tracking well above 2% annualized, the best quarterly performance of 2011. Momentum should carry through to 2012, withthe U.S. achieving above-potential growth for the first time in six years, helped by resilient domestic demand and inventory rebuilding. The big caveat, however, is that a European-triggered global financial crisis is averted by policymakers who would, presumably,have learnt about the devastating costs of inaction à la 2008.

• Facing challenges both at home and abroad in 2012, Canada stands to underperform the U.S. for the first time in six years. Domestic demand will be under siege from a likely softening in housing, and a more moderate pace to consumption spending. Tradewill be vulnerable to the lagged impacts of a strong Canadian dollar although there will be some offset in the form of increasing demand from an accelerating U.S. economy. With domestic demand treading water and European inertia threatening to trigger a globalfinancial crisis, the Bank of Canada is likely to delay interest rate hikes to 2013.

• In all provinces, economic growth in 2012 will feel the effects of declining government fixed investment and budget austerity. Growth will exceed the national average in each of the Western provinces, since natural resource development will not be impairedby the darkening of the global outlook. Conversely, growth will be sub-par in each of the Atlantic Provinces and in Ontario and Quebec.

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