The economic and political uncertainty now fueling financial market volatility likely will linger through 2013, with  public sector retrenchment and private deleveraging keeping a number of debt-heavy European nations in recession – and in the headlines. U.S. economic news has brightened with the pick-up in housing market activity and car sales, but overall growth will be tempered as Washington moves to reduce  its US$1 trillion budget shortfall.  New world powerhouses are expected to regain some of their recent loss in momentum, with growth reaching  8% in China, 6% in India and averaging around 4% in the major Latin American economies.

While many Canadian businesses, including those in the auto and lumber industries, are benefitting from the more upbeat household spending mood south of the border, export earnings will be constrained by rapidly increasing U.S. natural gas production and pipeline capacity bottlenecks.  Slower global growth has also taken the edge off of the boom in many commodity markets, although robust emerging market demand will continue to provide important support.  With net tourist earnings moving farther into deficit, our overall trade deficit in goods and services has moved to about $70 billion this year – a two-decade high of nearly 4% of GDP.

 As in the U.S., government retrenchment will temper Canadian growth prospects through mid-decade.  Unlike the U.S., our housing sector will lose momentum as activity recedes in a number of markets, particularly Vancouver and Toronto. Canadian employment, already at record highs, also will likely grow at a slower rate than in the U.S., where over 4 million jobs are still needed to get back to the pre-recession peak.  In this environment, Canadian GDP will be hard-pressed to exceed 2% in 2013, lagging the U.S. trend for only the third time since the turn of the millennium.

U.S. and European monetary policy settings will remain highly accommodative. The Federal Reserve has indicated that its benchmark overnight rate may stay close to zero through mid-2015 unless U.S. economic circumstances improve substantially. Even though the Bank of Canada will get a new Governor next summer, monetary policy will remain unchanged with low inflation, lacklustre growth and currency strength keeping our central bank on the sidelines into 2014.  Low interest rates continue to benefit borrowers, but present big challenges for pension funds, endowments and individuals saving for retirement.