What are my expectations with regards to economic growth in 2010 ?

In my opinion, the Canadian economy will be strongly influenced by what will happen in the United States, coupled with the probability that households will try to lower indebtness in the next few years. This, and the possibility of a significant tax increase in 2011 (Barack Obama must find a way to lower the American debt) should damper growth prospects.

Over the past year, the global economy has gone from recession to a mild recovery. Despite continued government funding, growth prospects for 2010 remain muted across developed economies. There is talk of lower governement stimulus towards the end of this year from most developed economies. If that is the case, consummers like you and me will need to spend even more to keep the economy growing. That will be especially difficult given high household indebtedness and stubborn levels of unemployment.

In Canada, short term interest rates are expected to increase in view of inflationary pressures although Mr. Carney has mentionned that rate hikes shouldn't happen before June 2010. I suspect an approximate increase of about 0.5% in the second half of the year although a lot of factors can change between now and then. If interest rates hikes do happen, it could add pressure to families and businesses who have variable-rates mortgages and loans. This could also be difficult for industrical and cyclical stocks.

Government deficits are expanding in all Western economies and policymakers will have to balance their desire to reign in spending with maintaining economic growth. All this debt is inflationary and the rate of inflation, while still low, is expected to increase next year.

Stéphane Mario and Pierre Lapointe, economists with the National Bank expect double digit gains in the stock market this year. I might be a bit more pessimistic, I think a 10% gain would be fair with regards to the arguments above.

As a conclusion, I do not expect to see the returns and robustedness of 2009 repeat this year. Instead, I expect a period of stabilisation and lower growth during which investments in stable companies will generate a positive return. Of course, my predictions are based on current economic data and will change throughout the year based on the new information I will receive.

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