Will 2014 be the year the economy gets back to normal? I hope so. The past few years have felt like a dinner party in a condemned house. We’re all trying to enjoy our cocktails and stuffed piquillo peppers, but everyone keeps glancing at the ceiling wondering what that funny cracking sound is.
While there’s been plenty of good news lately—surging markets in the U.S. and Europe, falling unemployment rates and near-record levels of corporate profits—it still hasn’t felt like business as usual. How could it? How could anyone believe we’re out of the woods when Canadian interest rates are still being artificially squelched and the U.S. economy is so fragile that the Fed continues to snap up US$65-billion in bonds every month?
You can’t blame corporations for their caginess. Profit margins are well above average—near historic highs, according to BMO Capital Markets—yet corporations have been hoarding cash like they expect that ceiling to come crashing down at any moment. In the U.S., cash and equivalents on balance sheets in the non-financial corporate sector hit $1.5 trillion last year—nearly the highest level since the 1950s. Here in Canada, cash balances are at about $280 billion, higher than they’ve been for decades.
I’m tired of this kind of corporate environment. Companies are doing well, but there’s no optimism. Everyone’s so afraid that things will go bad that fear itself has become the largest obstacle to growth. I’m no Roosevelt, but I’m going to call it right now: 2014 will be the year companies stop looking over their shoulders and start looking forward to a brighter future.
The main driver for this change will be the U.S. The Fed is finally tapering its quantitative easing program, and it’s looking more and more like the American economy can support itself without the easy-cash crash cart. The government there seems to have grown up a little, too, indicating there will be less feuding and more focus on fixing the economy. Both factors will go a long way to increasing corporate and consumer confidence, and most economists are predicting the U.S. will enjoy an increase in real GDP in 2014 in the range of 2.5% to 3%.
That will have a direct effect on the Canadian economy. As CIBC World Markets deputy chief economist Benjamin Tal has noted, a one percentage point tick up in U.S. growth historically means a three percentage point rise in capital spending by Canadian companies. Meanwhile, the loonie is finally starting to trend downward against the greenback, which will juice the export market and help the manufacturing sector. As Douglas Porter, chief economist at BMO Capital Markets, recently pointed out, growth right now is too low and inflation is too low, but consumer debt is too high. The best way to solve that conundrum? A falling dollar, which will help to relieve the first two problems without exacerbating the third.
Of course, whether or not this is the year we can finally put the 2008–09 disaster behind us and move on depends largely on how Canadian corporations react to the positive news. If they continue to be fearful, they’ll dampen the recovery. If they finally start investing in new products, new markets, new machinery and new employees, 2014 could be the year things turn.
Most economists are predicting that Canada will see year-over-year real GDP growth of just more than 2%. I think 2014 could be much better, with growth as high as 3%. With any luck, it will be the best year we’ve seen in a while.