Monthly Economic Webcast
Deflation in Context - April 2015
Eric Lascelles, Chief Economist, RBC Global Asset Management, shares the latest views on the global economy and offers insight into today’s economic issues.
- The generally positive outlook for global growth remains solid, with the impact of sharply lower oil prices working to help boost consumer and business spending in many countries. Meanwhile, the negative impact of lower oil prices on net exporters (e.g., Russia) of the commodity is taking its toll on their growth.
- Recently, the U.S. economy has begun to show some signs of softening, with a cold winter hitting the housing sector and consumer spending, but overall it remains on course with its expansion. Wage growth is inching higher, with some sectors of the workforce enjoying meaningful gains that are likely to set the stage for a broader increase. Wage growth remains a major factor in the U.S. Federal Reserve's decision as to whether and when to raise interest rates.
- Europe continues to show encouraging signs of having found its economic footing. Momentum is building thanks to the effects of lower oil prices, a weaker euro and abnormally low borrowing costs, all of which have worked to push private sector confidence higher.
- Emerging markets remain vulnerable to a rising U.S. dollar, which in the past has brought crises to many of these nations. But much of the damage – realized and potential – has been priced into the group's equity valuations, making them attractive on a relative basis to North American equity markets.
- Oil's steep decline continues to wreak damage on some segments of the Canadian economy while boosting others. Alberta's economy is showing signs of a sharp downturn, while Ontario's more manufacturing-driven economy is demonstrating clear indications of benefitting from cheaper oil and a lower loonie. Overall, Canada's economic growth is still projected at a solid 2.8% for 2015, and the real estate market, while soft in some areas, is not showing signs of a major downturn.
The webcast includes an audio and slide presentation.
Launch Presentation 
Quarterly Economic Video
Eric Lascelles - Spring 2015
In the latest instalment, Eric provides an overview of how economic activity has unfolded this past quarter in regions across the globe.
Key Highlights
- In the first part of 2015, global economic growth has slowed slightly, though we are still forecasting higher growth this year than last year. Concerns over deflation and geopolitical risks from Russia and Greece are balanced by contributors to global growth: lower oil prices, lower borrowing costs and lower currency costs for many countries.
- We have lowered our inflation forecast this quarter. Some of that falls into "good" deflation in that it comes from supply shocks (low oil prices) rather than from low demand. We believe it is unlikely that inflation will return to normal levels over the next few years, but it still more likely that inflation rises over the next year than it falls.
- The U.S. Federal Reserve is priming itself for rate hikes in the not-too-distant future, motivated by a tightening labour market, and is seemingly not concerned by a strong U.S. dollar.
- The European Central Bank (ECB) announced massive quantitative easing in March, moving to buy €1 trillion in bonds over the next year-and-a-half. Sweden, Denmark and Switzerland cut interest rates, as did Canada and Australia. Finally, because of lower growth, a number of emerging-market countries cut their interest rates, including China, Indonesia, India and Turkey.
- The combination of lower inflation, quantitative easing and interest rate cuts has brought bond yields down to extraordinary levels.
- We believe the Eurozone may be the next region to normalize from a growth perspective, benefitting from lower oil prices, ECB stimulus and a lower currency.
- We still stubbornly think oil prices will increase. At $50, a barrel, fully half of oil production is unsustainable. And currently, supply exceeds demand by only 2%. We are seeing an adjustment on the supply side: rig count in US has fallen by more than a third. Eventually that maps on to less production.
- Economically, Canada is in a tug-of-war. Lower oil prices hurt an oil exporter like Canada, but a weaker Canadian dollar, strong U.S. demand and the Bank of Canada rate cut are positives. We have pulled our growth forecasts down a bit: we believe Canada will be slightly disappointing but will still grow fairly handily.
- In our asset mix recommendations, we are still overweight stocks. Lower growth doesn't make us pleased, but ultra-low bond yields don't give us a lot of alternatives.
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