As we head into 2018 RBC Wealth Management thought it would be helpful to reflect on five of the trends from 2017 that will have a bearing on the economic outlook for 2018 and beyond.
1) Outside of the NAFTA-related turmoil, the biggest and most noticeable surprise likely came from the world of the so-called crypto-currencies as prices for the dominant player, Bitcoin, went vertical through the course of the year. The meteoric rise has left many wondering if crypto-currencies will prove to be kryptonite for some investors. While many things can be said about cryptocurrencies– including that they are not currencies – one should separate the object from the technology underlying it which has a very promising future.
2) Unlike some asset markets, consumer price inflation has been consistently surprising to the downside around the globe. Global supply chains, excess labour market capacity and low inflation expectations have kept inflation in check. For Canada another factor also appears at play – competition in the retail space, first in brick-and-mortar and now online.
3) The low inflation environment has been reflected in financial markets as longer term interest rates were little changed through 2017, contributing to a flatter yield curve. The Bank of Canada contributed to the flatter curve by moving overnight interest rates up twice in an effort to get in front of any inflationary pressures down the road. The flatter yield curve this late in the business cycle has many worried about the potential of a recession though we see such worries as misplaced.
4) Rising interest rates along with a number of regulatory moves has finally turned the housing market over though we still expect a cooling rather than a collapsing. Demand indicators have softened which have taken some of the steam out of prices but a sustained cooling in some of the hotter markets will await more supply which has not yet been the focus of policy makers.
5) Outside of cooling the housing market the other policy focus of the federal government has been to further stimulate the economy. This procyclical fiscal policy comes at expense of balanced budgets which have been either the actual or aspirational goal at the federal level for decades. A fiscal plan based on deficits as far as the eye can see reduces the fiscal flexibility of the government and creates risks that taxes will move higher. This shift at the federal level combined with a number of provincial initiatives and a U.S. administration that is moving taxes lower erodes Canada’s relative competitiveness.
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