Risk of Recession Small, But Concerns on Global Economy Growing

The tragic event in Japan have not only caused concern for the families affected, however it has also added growing concerns about the strength of the recovery, however it should not push either the Canadian or global economies back into the recession according to CIBC.

As a matter of fact, in the latest monthly report, CIBC World Markets has predicted that growth will remain relatively strong in Canada despite a slowing of growth in many other countries due to rising oil prices and restraint in government spending.

Canada is not immune to issues facing the global economy, the report forecasts real GDP growth of 4% for the country in the first quarter of 2011.

Until now, most analysts have been predicting the bank would hold off on a rate hike until at least mid-year, however that may not be the case not. CIBC senior economist Peter Buchanan expects the Bank of Canada to increase its trend-setting overnight rate as early as May.

The CIBC World Markets report noted that it will take time before information is available to make a complete and accurate assessment of the implications of the events in Japan, which includes the crisis at the Fukushima Dai-ichi nuclear plant following last week’s earthquake and tsunami. The report does note that the global economy was already facing increased uncertainty on a number of fronts, before last Friday’s disaster.

Buchanan noted that the global economy finds itself buffeted by new and in some cases, completely unforeseen developments, after riding strong tailwinds late last year.

The risk of outright recession would still appear to be quite low, however those developments have led to a scaling back of earlier optimism and an increase, for not at least in risk aversion.

It was also reported that strong but not sky high oil prices are also best for the Canadian economy. Knowing this fact is definitely not something I wanted to hear, especially since my gas expense has only gotten larger over the past couple months.

What other reasons raises concern for a recession?

The report continued to note that in addition to higher oil prices, global growth is also being dragged down by increased government fiscal restraint, particular in the U.S.

Rising debt levels will results in dramatically higher interest payments over time, which cuts spending sharply while the economy is still recuperating are not without any risks.

Another risk to global growth is the fact emerging market economies are likely to increase monetary tightening and other measures to tackle inflation to ensure long term price stability, which will cool performance to what has been some of the world’s hottest performers.

Overall, I believe that Canada may not dive back into recession, but the disaster in Japan has definitely caused concern for the global economy.

How do you see the global economy after the disaster in Japan?

image source: jmv