We’ve come a long way since the beginning of the year, and can look forward to further improvement in 2010.
That’s Mike Drotar’s current take on the economy, as Canada and the world emerge from recession.
Vice-president treasury with Servus Credit Union, Drotar pointed out that since January, the price of oil has jumped 71 per cent, the loonie has gained 18 per cent relative to its American counterpart, the prime interest rate has declined to 2.25 from three per cent and the Toronto Stock Exchange has surged 33 per cent.
In fact, he continued, the TSX has climbed 52 per cent relative to its low point in March — buoyed by financial services and resource companies.
“The banking stocks are close to their July 2008 highs, actually,” said Drotar, adding that energy stocks are up an average of 41 per cent since January.
That doesn’t mean it’ll necessarily be smooth sailing for everyone.
“I think the U.S. economy is still very fragile,” said Drotar, pointing out that banks there are still reluctant to lend.
“And if they’re not lending it’s hard for the economy to gain any traction.”
Rather than the United States or Europe pulling the world out of recession, emerging economies like China, India, South Korea and Brazil are leading the way, he said.
“The developing countries are gaining more economic power and clout than the U.S.”
“To put it into perspective,” added Drotar, “the U.S. might be lucky if they get 2 1/2 per cent growth next year, China’s growth is projected to be 9 1/2 per cent-plus.”
From a Western Canadian perspective, strong growth in China would be good news. That’s because it will generate demand for resource commodities, he explained.
“I’m personally extremely bullish, long term, on oil prices.”
A barrel of crude will sell for $95 within three years, predicted Drotar, and $100 within five years.
His outlook for natural gas is less positive, with prices likely to climb to between $6 and $8 per thousand cubic feet in 2011.
“That’s because it’s North American driven, and until the States picks up it’s going to be hard to see natural gas come up.”
Drotar doesn’t anticipate that short-term interest rates will increase until late in 2010 — with the U.S. Federal Reserve likely to keep rates low until excess housing and labour capacity south of the border have been absorbed, and the Bank of Canada forced to follow suit or risk a damaging jump in the exchange rate.
Longer term, said Drotar, the United States will face mounting pressure to get its massive debt under control.
“You could see potentially a major collapse in the U.S. dollar,” he warned.
“They’ve got a deep hole to dig out of.”
Drotar expects Alberta to enjoy economic growth of about three per cent in 2010 — contrasting sharply with a 2.6 per cent contraction this year.
Unemployment will remain under seven per cent, he said, and real estate will rise in value.
“I can see where real estate, or housing prices, in Alberta will increase 15 per cent-plus by 2011.”
Finally, anyone hoping the equity markets to continue their steep ascent might be disappointed.
“I think the major move has already been done,” said Drotar, who anticipates single-digit returns on average for the next three of four years.
He doesn’t think the S&P/TSX composite index, which currently stands at about 11,500, will return to its July 2008 high of 15,000 until 2013.
“I think it’ll be gradual growth.”