>Top 10 Questions for 2010 (ECONOMIC RESEARCH)

1. Will the recovery become self-sustaining? Viewed from the depths of despair earlier this year, even the mild turnaround in the global economy in recent months is nothing short of remarkable. But while the economies of the U.S. and Canada may have stopped falling around the middle of 2009, the recovery has been tepid so far, and that’s even with a heavy assist from government spending. Conditions are gradually falling into place for a firmer and self-sustaining recovery next year, especially with employment finally stabilizing and business confidence perking up. Even so, the conventional wisdom that the upturn will remain subdued by past standards looks quite compelling. The main reason: the U.S. consumer simply is not going to ride to the rescue for global growth as it has so often in the past. Accordingly, we look for GDP growth of around 2½% in both countries next year (Chart 1); that’s not bad under normal circumstances, but it’s disappointing in the wake of the worst single year for U.S. growth since the 1940s.

2. Has the jobless rate peaked? The unemployment rates in both Canada and the U.S. ticked down last month, and recent hiring intention surveys have picked up, sending a tantalizing hint that the worst may be over on the job market front. However, it may be a tad premature to sound the all-clear note just yet, especially in the U.S., where the recovery will still be too modest to generate solid job gains for some time yet (Chart 2). The employment outlook is generally more positive in Canada, due to the relative strength in job-rich domestic spending areas such as housing and consumer spending. However, in both countries, we look for the unemployment rate to be lower a year from now.

3. Will China’s growth remain strong enough to drive commodities higher? To paraphrase our Global Commodity Strategist, Bart Melek, “Commodity markets have performed much better than anyone would have dared to predict at the beginning of 2009, when global depression chatter was rife and massive deleveraging and panic selling were the order of the day. Depression was averted thanks to massive government spending in China, the U.S., Europe and elsewhere totalling some $2.2 trillion, zero interest rates and various central bank liquidity measures.

4. After a powerful rebound, are stocks due for a correction? We have long maintained that the real distortion in equity markets this year was not the massive 65% bounce from the March lows, but the depth of those March lows. Much of the rebound in stocks occurred in the first two months after the lows were hit, driven by the realization that the global economy and credit markets were stabilizing, with a helping hand from extremely accommodative monetary policies globally. While the annual gains in many major equity markets in 2009 are certainly impressive—the TSX is currently just shy of a 28% rise this year, vying for the best performance in 30 years—they are by no means highly unusual, especially in a recovery phase.

5. Is the Canadian housing market set to pop? It seems many are falling over themselves to pronounce that the Canadian housing market is in a bubble, partly because it has been able to fully recoup all of its (fleeting) recession losses in a matter of months (Chart 4). If anything, we believe the risk is that the market will get even hotter in the first half of 2010, ahead of impending interest rate hikes and the Harmonized Sales Tax in B.C. and Ontario at mid-year. There is bound to be at least some modest correction in the second half of next year, almost certainly in sales, and possibly in prices.

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