Higher exports, business investment needed to support economic growth: CIBC

Exports and business investment should accelerate over the next couple of years, helping to ensure sustainable growth in the Canadian economy, according to a new report from CIBC World Markets which came out on the same day that Statistics Canada reported a major improvement in the country's merchandise trade balance.

"We see 2015 as a nice year and 2016 even better where we see definitely investment entering the equation and replacing housing and the consumer," deputy chief economist Benjamin Tal said in an interview.

Consumer spending and residential construction have provided an unexpected lift so far in 2014, but can't provide long-term support to the economy, according to the report released Thursday.

Tal noted that consumer spending has increased as people have dipped into their savings rather than benefited from higher incomes, something he said is not a sustainable model for growth but simply buying time until the more lasting contributors take hold.

As well, business investment is well below where it should be at this stage in the cycle, Tal said, adding that the issue isn't financial limitations but a willingness to invest.

He said corporate Canada appears more inclined to spend on foreign upgrades or takeovers, while foreign direct investment by Canadian companies rose by a record high nine per cent in 2013.

Still there are signs that investment spending is about to accelerate. The Bank of Canada's Business Index is now at a level that, in the past, was consistent with real business investment climbing by close to five per cent annually.

Also on Thursday, Statistics Canada said the country's merchandise exports grew by 1.4 per cent in July, while imports edged down 0.3 per cent. That raised Canada's trade surplus with the world to $2.6 billion from $1.8 billion in June. Economists had expected a surplus of about $1.2 billion, according to Thomson Reuters.

Exports rose to $45.5 billion, led by motor vehicles and parts, while imports edged down to $43 billion, with lower imports of aircraft, other transportation equipment and parts and consumer goods, as well as metal and non-metallic mineral products.

Exports to the United States rose 1.9 per cent to $34.4 billion and imports rose 1.2 per cent to $29.2 billion, pushing the trade surplus with that country to $5.1 billion from $4.9 billion in June.

Shipments to countries other than the United States edged up 0.1 per cent to $11.2 billion, while imports from those countries declined 3.2 per cent to $13.7 billion. The trade deficit with those countries narrowed to $2.6 billion from $3 billion in June.

CIBC (TSX:CM) forecasts the Canadian economy will grow 2.3 per cent in 2014, 2.7 per cent in 2015 and 2.3 per cent in 2016.

The report said the U.S. economy and labour market recovery may be stronger than some expect, putting pressure on the Federal Reserve to boost interest rates to 1.25 per cent by March.

The Bank of Canada will likely try to keep the market guessing about its own rate hike to weaken the Canadian dollar but will ultimately be forced to revise its forecasts and raise its overnight rate to 1.5 per cent from one per cent by the end of 2015, Tal said.

"Clearly we need to see the Canadian dollar going down and I think that's what the Bank of Canada would like to see also," something that would help export-focused industries, said Tal.

About one quarter of the cross-border output is in the energy sector. Canada is expected to export more than 230 million additional barrels of crude in 2016 than it did in 2013. But non-energy exports like forestry products, machinery, aircraft products and electronics, identified by the Bank of Canada as key to the next resurgence, have lagged.

Many of these products have been historically sensitive to the exchange rate. Exports in loonie-sensitive sectors have gained 11.8 per cent in the past 12 months in face of a weaker Canadian dollar, compared with 8.7 per cent for other non-energy industries.

Meanwhile, Tal said higher interest rates would hurt the bond market in the coming six to 12 months, before recovering in 2016 when rate hikes will be less than the market expects.

The CIBC also forecasts that the Canadian stock market, which has been on a tear this year will slow to 11 per cent in 2015.

"It's very difficult seeing this momentum continuing. . . . This is the time to stick to quality names and definitely even the bank stocks because I think people need to be a little bit defensive," Tal said.