RBC GAM on eurozone, US and Canada

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By Eric Lascelles, Chief Economist, RBC Global Asset Management

Eurozone GDP

The eurozone economy managed to grow a little faster than expected in the fourth quarter, signalling what may be the beginning of an upswing across 2015 and into 2016.

Germany and Spain are pushing higher and Italy is finally back to scratch.

The stimulus of rock-bottom oil prices, a soft euro and ultra-low bond yields is evidently beginning to work, and Europe’s credit market continues to revive. A variety of political and geopolitical risks threaten this scenario, but we believe the European economy can withstand them.


Greek negotiations continue to go poorly, with no obvious progress to date. The country is about to bump into a hard deadline at the end of this week given that any negotiated deal needs to be passed by several eurozone nations and approved by the end of the month when Greece is set to run out of funds.

Naturally, any resolution is likely to come at the last possible moment, so there remains a fair chance of a deal. Nevertheless, our assessment is that the odds of a deal are only around 50%, and the risk of Greece exiting the Eurozone is now around 25%.

The consequences of any exit would be materially smaller than they would have been in 2011/12, but nevertheless consequential, especially to the Greek banking sector.

US industrial production 

US industrial production for January should rise by 0.2% this month – a hair below consensus. While some growth is still likely, durable goods orders have lately been quite weak, energy-sector production should be softer and utility demand may not be as strong as some are imagining due to unusually warm weather in the US West that may more than offset the unusually cold conditions in the East.

In the end, we are not overly worried about the medium-term prospects of US manufacturers, but January probably wasn’t a great month.

Canadian regions

Various Canadian leading indicators continue to point downward, signalling that the pain of lower oil prices is trumping the pleasure of a weaker Canadian dollar. The softness spans the RBC Canadian Manufacturing PMI, the Bloomberg Nanos Confidence Index, the Ivey PMI and components of the CFIB Business Barometer.

So far, the weakness is merely consistent with a mild economic deceleration, and has prompted us to reduce our 2015 growth forecast by 0.25ppt to 2.0%.

However, the regional implications should be significantly greater. The NFIB Alberta and Saskatchewan indices have both weakened substantially. Alberta housing starts look fine, but existing home sales have fallen by almost 20% in two consecutive months and Saskatchewan existing homes were down 19% in the latest month.

Home prices have proven more resilient so far – and should remain fairly steady given the 2008-09 experience – but are nevertheless slightly lower, down 2% on the year in Alberta.

Should oil prices remain near current levels, a mild Alberta recession is probable. Should they rebound significantly over the course of 2015 as we expect, then this should be avoided.


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