Merrill Lynch Canada's Economist and Strategist David Wolf updates his economic outlook for Canada today and it's not exactly a cheery view:
“we continue to see Canada experiencing a deeper recession than does the consensus, with concomitant downward pressure on inflation, interest rates and company earnings.”
All forecasts, and Wolf's is no exception, hinge on the forecaster's prediction for Canada's gross domestic product this year. The “consensus” call (not exactly an average but close enough) of private sector forecasters is that GDP this year will shrink 0.8 per cent. The Bank of Canada thinks it will be worse than that, that GDP will shrink 1.2 per cent. Wolf believes it will be much worse: A contraction for the year of 1.7 per cent.
Why? “Consumer spending … appears to be declining at an alarming pace.”
The worst part of the year is right now, Q1. Wolf cut his forecast from GDP growth of -2.9 per cent to -5.2 per cent.
“The weaker activity outlook prompts a weaker employment profile, with our estimate of the peak-to-trough jobs decline rising to roughly 400K, yielding aprojected unemployment rate of 8.6% by year-end,” Wolf writes.
And what does that mean for the key overnight interest rate in Canada? Wolf says the Bank of Canada will have no choice but lower it to “effective zero.”
And why should one believe the Merrill Lynch people?
This blog post doesn't exactly inspire confidence in a Merrill Lynch forecast:
http://www.thedailybeast.com/blogs-and-stories/2009-01-22/john-thains-87000-rug/
«… In early 2008, just as Merrill Lynch CEO John Thain was preparing to slash expenses, cut thousands of jobs and exit businesses to fix the ailing securities firm, he was also spending company money on himself, senior people at the firm say.
According to documents reviewed by The Daily Beast, Thain spent $1.22 million of company money to refurbish his office at Merrill Lynch headquarters in lower Manhattan. The biggest piece of the spending spree: $800,000 to hire famed celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.
Big ticket items included $87,000 for an area rug, four pairs of curtains for $28,000, a pair of guest chairs for $87,000 and fabric for a “Roman Shade” for $11,000. …»
Please note: I do not begrudge corporations their high profits if they're made honestly; ditto the high salaries earned by movers and shakers – again the big proviso being that they be earned honestly.
But there's been far too much evidence of “conduct unbecoming an officer [of companies] and a gentleman” for that trust to remain intact.
Furthermore, the more bad “news” we hear, the more pessimistic we all become, and the crystal ball gazing becomes a self-fulfilling prophecy.
Merrill's much publicized corporate problems have nothing to do with the intelligence of their forecasters. I have met Wolf several times and have been following his research since he was at RBC Dominion Securities. He would be a smart cookie no matter who he worked for.
To dismiss his work (or his Canadian New York-based supervisor David Rosenberg) simply because of the follies of some corporate chieftains would be a foolish thing to do. As with anyone's economic, market or equity research, the research alone should stand or fall on its own merits. And Wolf's consistently measures up.
You'll note that I questioned the credibility of the entire organization (primarily because of the behaviour of their CEO as outlined in the Daily Beast blog post). I did not focus on any individual in particular, least of all Wolf.
I suppose what my comment shows is that I'm not immune to the pervasive disease ailing our society, even at this not-so-early stage in my life, of doubting once proud and reputable institutions – you know, like some people questioning the RCMP's motives in the investigation of the income trusts, or others implying the CF possibly enabled torture in Afghanistan, allegations I found repugnant.
Unfortunately, the public trust continues to be eroded daily by comments and “analysis” from “commentators” like Jon Stewart, Rick Mercer, and others of their ilk. Add in the glib talk show hosts, and all one hears is mockery which is then reflected even in supposedly serious op-eds in major newspapers.
I guess I haven’t managed to escape that cynicism.