Optimism returns about economic prospects as steep fall slows

OTTAWA — A hair-raising plunge in the world and Canadian economies this winter is showing signs of levelling off as new evidence emerged Wednesday pointing to improving conditions.

OTTAWA — A hair-raising plunge in the world and Canadian economies this winter is showing signs of levelling off as new evidence emerged Wednesday pointing to improving conditions.

Economic growth is till months away, say economists, but with each “less bad” indicator that is posted, fear of continued free-fall is being replaced by cautious optimism.

“I’m in the glass half-full camp,” said Bank of Montreal deputy chief economist Douglas Porter.

“The way the financial markets are going, I think it’s quite possible we’ll see a recovery sooner than the end of the year. It seems the optimism is becoming more infectious around the world, and that’s a good thing.”

The glass half-empty camp argues that financial markets, while much improved, remain risk adverse and that the recovery may be too dependent on temporary massive government stimulus to be sustained.

Wednesday saw a number of reasons to support a growing consensus that sees global economies preparing to come out of the nightmare of the past few months.

— Canada’s inflation rate fell to a near 15-year low of 0.4 per cent in April, a clear signal of economic weakness but because the plunge was due to a single-factor — lower gasoline prices compared to last year — the steep drop was not worrisome.

— The country’s leading indicator of future economic activity rose 0.5 per cent last month over March, the first sign of life in eight months.

— As significant, a survey of 220 fund managers by Bank of America-Merrill Lynch showed the bulls are waking from their slumber, with 57 per cent of managers forecasting a stronger global economy in the next 12 months.

“The unrelenting gloom of a mere three months ago has been replaced by a fairly typical early-cyclical sentiment, with the only hint of potential irrational exuberance in emerging markets,” the global investment bank said.

The May survey showed that fund managers are still reluctant to jump into the market with both feet as asset allocations remain underweight in securities by six per cent, but that is less than the minus-17 per cent number found in the April survey.

Merrill Lynch analysts said there is still a risk of “too much, too soon” with the stock markets rally of the past two months, but noted that unlike last fall and early 2009, investors now appear willing to shrug off bad news in expectation the economy will indeed recover.

The past month has seen the emergence of a number of so-called “green shoots” that point to an improving economic landscape.

After a correction last week, Toronto’s stock exchange was back over the 10,000-point line this week, taking in stride General Motors’ announcement Wednesday it will shutter close to 300 dealerships across Canada to reflect a long-term drop in sales volumes.

More bad news is on the way as countries start reporting first-quarter gross domestic product retreats in the next few weeks.

Japan was among the first off the block Wednesday, saying its economy contracted a massive 15.2 per cent, the most since it began to keep records in 1955.

The Bank of Canada forecasts Canada’s first quarter GDP contraction will top seven per cent when all the data is available in two weeks, also the worst performance since records began in 1961.

But these numbers represent a rear-view mirror of the economy, say analysts, something markets have already left behind.

CIBC economist Krishen Rangasamy says the inflation numbers indicate that Canada does not have an inflation problem, nor does it need to fear deflation setting in as government and central bank stimulus is likely to push prices higher later in the year.

Economists also judged that the Bank of Canada is now less likely to resort to extraordinary measures — expanding the money supply to increase credit — because the risk of further steep contraction has diminished.