Pundits predict recovery in 2002

Vancouver — 2001 will not go down as a banner year for the global economy. Exactly when we entered the first recession in 10 years seems not to be an issue, but when we start to come out of it is.

Most research reports by the major Canadian banks and metals analysts seem to agree that “recession-like” conditions will prevail over the next couple of quarters, followed by a U.S.-led revival to global economic growth by mid-2002.

Driving the optimism for next year is the prediction that low interest rates, falling energy prices and government tax cuts will finally take hold. The U.S. Federal Reserve cut interest rates 11 times this year, leaving the federal fund rate at 1.75% and a discount rate of 1.25%. The easing puts the funds rate at its lowest level since 1961 and the discount rate at its lowest since 1948. The Bank of Canada followed the lead of its major trading partner by slashing interest rates nine times to 2.5%. The rate has not been this low since September 1960, when it was 1.95%.

Despite the rapid fall in interest rates, economists would not rule out further rate cuts.

“There’s not a hint of any inflationary pressures out there,” says Marc Levesque, senior economist with Toronto-Dominion Bank. “With core inflation expected to remain extremely subdued over 2002, there’s absolutely no reason for them not to press hard on the monetary accelerator. The big mistake out there is the tenuous assumption that central banks have finished easing.”

States Bank of Montreal economist Paul Ferley: “I think the risks are on the downside. If, in the early part of next year, we get any indication of declining activity continuing in Canada or the U.S., the Bank of Canada will likely be prepared to move again.”

The Bank of Canada’s next scheduled rate announcement is Jan. 15.

Josh Mendelsohn, chief economist for Canadian Imperial Bank of Commerce (CIBC), concurs that the short-term outlook remains bleak but that a recovery is in the wind for the second half of 2002.

“Weak consumer confidence combined with excess industrial capacity are hurting short-term growth prospects,” states Mendelsohn. “Many of these negatives should dissipate over time, assuming there are no further attacks on the U.S. and that the war against terrorism has no major setbacks.”

The Canadian economy shrank during the third quarter for the first time in a decade, and a potentially wider contraction is expected in the fourth quarter. Nonetheless, CIBC predicts that the Canadian economy will outpace its U.S. counterpart this year and in 2002, with the U.S. expected to report growth of 1.1% in 2001 and 1.3% next year, compared with Canada’s 1.4% in 2001 and 1.7% in the following year.

“Canada is expected to perform more strongly than the U.S. both this year and next, as that nation’s industrial sector struggles to recover from an era of massive overinvestment,” adds Mendelsohn.

The report predicts that interest rates on both sides of the border will begin to rise but notes that both central banks may cut rates again in the next couple of months “to build insurance for an economic recovery later in the year.”

CIBC predicts that employment will trail the rebound and forecasts the Canadian unemployment rate to climb further in 2002, hitting 7.7%. Canada’s unemployment rate currently stands at 7.5%.

The Canadian dollar, which slumped to record lows in November, is also expected to fare better next year, according to CIBC. The currency is forecast to rise to US65, and possibly higher by the end of 2002.

The National Bank of Canada’s chief economist Dominique Vachon sees a slightly more modest recovery in 2002.

“Low inflation has given the central banks considerable maneuvering room,” states Vachon. “The impact of the interest rate cuts, starting at the beginning of the year, will be felt in the coming months. The major efforts made by most of the governments of the industrialized countries to clean up their finances this past decade have made them much less vulnerable to the economic slowdown they face today.”

The National Bank sees the U.S. economy growing by 1.2% in 2002, after contracting about 1.5% in the fourth quarter of 2001. Canada, for its part, is expected to grow by 1.2% in 2002 before hitting its stride with a growth rate of 3% projected for 2003.

Merrill Lynch’s metal future analyst, William O’Neill and brokerage house JP Morgan agree that the short-term outlook remains weak.

“For some time, we have been saying that the first quarter of 2002 would be the likely time for a demand-led price recovery in such metals as copper and aluminum, but at this point, that might be optimistic and it could easily take longer for the turnaround to materialize,” states O’Neill.

JP Morgan is quick to cut its 2001 price forecasts for precious and base metals following the Sept. 11 terrorist attacks on the U.S.

The brokerage house says the current downturn in commodity markets is still seen as cyclical, rather than a more worrying structural dislocation. But the U.S. business cycle is unlikely to show a meaningful recovery until the second quarter of next year, and it may not be until late 2002 that non-U.S. economies start to show some form of synchronized recovery.

Based on this scenario, JP Morgan sees some upside for most of the metals next year: aluminum is projected to rise to US82 per lb., compared with the 2001 estimate of US70.3; copper is slated to rise to US88 per lb., compared with US80; lead, to US28 per lb., compared with US23; and zinc, to US48 per lb., compared with US44. Continuing to suffer from oversupply, nickel prices are projected to fall further, hitting US$2.60 per lb. in 2002 from an estimated average of US$3 in 2001.

JP Morgan’s estimate for precious metals is equally uninspiring. The company has tabled a projected gold price of US$273 per oz. for 2001, whereas the price in 2002 is slated to be US$280 per oz. The estimate for the silver price in 2001 is US$4.45 per oz., and next year it is expected to remain flat at US$4.45 per oz. Platinum is expected to average US$530 per oz. in 2001 but will likely fall drastically lower next year to US$395; ditto palladium, which is projected to average US$610 per oz. in 2001 but plummet to US$350 in the year ahead.