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Investors should brace themselves for explosive economic growth in the coming quarters as trade with the United States rebounds, Merrill Lynch said Tuesday.
Economist Sheryl King said the latest Bank of Canada report suggests the economy could bounce back with several quarters of 10 per cent growth in the next year. Her report is titled: “Are markets ready for 10 per cent GDP?” The answer to her question is a solid “no.”
“Fixed income and equity markets alike are overly focused on yesterday`s news,” she said. “But we`ve seen a huge surge in business sentiment, which is a much more timely piece of information even though it is anecdotal.”
She said the Bank`s Business Outlook survey turned sharply in the second quarter, with a reading of 39 compared to -22 in the first quarter and “an epic” -34 in the fourth quarter.
“The markets are far too fixated on the slow, halting, return to growth scenario, in our opinion – especially since recoveries virtually never have that nice linear trajectory,” she said.
She said the survey`s correlation with real GDP growth is “quite strong” at 60 per cent and implies year-on-year GDP growth in the 4.25 per cent range.
To reach that number, she said “a burst of growth” would be needed in the fourth quarter or first quarter of 2010. While investors have been disappointed in several economic reports recently that haven`t validated the 42 per cent run in stocks from March lows, she said the bank`s report “was taken between late May and mid-June and thus is more up-to-date on the state of the economy than most of the recent data flow.
“The survey has an even stronger correlation with economic activity stateside than for Canada,” she said. “If true, businesses may be getting a sense of better cross border order-flow that we have not yet seen in any hard data release, and we may see a better tone in those trade figures in the next couple of quarters. Certainly, the unusual jump in Canada railcar shipments in June and into July corroborates this possibility.”
The bounce, she warned, could be short-term. She has recently expressed concern that Canada`s central bank will snuff any recovery by withdrawing stimulus measures too soon.
“I`d say it`s almost guaranteed if we see pop in growth that we won`t see a sustained pop,” she said, as she recommended investors turn to cyclical stocks to benefit from the growth. “Investors may want to think about dipping their toes into cyclicals, although they are trades you maybe want to rent rather than own since I`m not sure we`ll see sustained growth.
While she raised the possibility of sharper-than-expected growth, she didn`t go so far as to change her outlook for the year. Her 3.8 per cent target puts her at the top end of the range of expectations – The Conference Board of Canada expects a contraction of 1.9 per cent while the International Monetary Fund has predicted Canada`s GDP will shrink 2.3 per cent this year.
Douglas Porter, a senior economist at BMO Nesbitt Burns Inc., said it would be possible for a quarter or two of rapid growth “if everything went absolutely perfect in terms of stimulus spending and recovery,” but cautioned the global economy is still on very shaky ground.
“Things were so very depressed that I wouldn`t be surprised if we saw a temporary bounce,” he said. “But the bigger question is whether that growth can remain robust for more than a quarter.”
A double-digit recovery wouldn`t be without precedent, Mr. Porter said. Singapore`s economy staged an unexpected recovery in the second quarter, with government data showing the economy grew at an annualized 20.4 per cent from April through June compared to the previous three months after double digit declines in previous quarters.
“I do think we`re going to start seeing things like this happening around the world in the coming quarters,” Mr. Porter said. “But there are still very severe headwinds for the global economy.”
Meanwhile, second-quarter growth figures from China to be released by Beijing on Thursday are expected to show the economy expanded 7.5 per cent in the second quarter.
“The Singapore economy is back and back with a vengeance,” Robert Prior-Wandesforde, senior Asia economist for HSBC in Singapore, told the Associated Press. “We very much doubt that today`s Singapore GDP release will be the last in Asia to provide a sizable upside surprise.”
Economist Sheryl King said the latest Bank of Canada report suggests the economy could bounce back with several quarters of 10 per cent growth in the next year. Her report is titled: “Are markets ready for 10 per cent GDP?” The answer to her question is a solid “no.”
“Fixed income and equity markets alike are overly focused on yesterday`s news,” she said. “But we`ve seen a huge surge in business sentiment, which is a much more timely piece of information even though it is anecdotal.”
She said the Bank`s Business Outlook survey turned sharply in the second quarter, with a reading of 39 compared to -22 in the first quarter and “an epic” -34 in the fourth quarter.
“The markets are far too fixated on the slow, halting, return to growth scenario, in our opinion – especially since recoveries virtually never have that nice linear trajectory,” she said.
She said the survey`s correlation with real GDP growth is “quite strong” at 60 per cent and implies year-on-year GDP growth in the 4.25 per cent range.
To reach that number, she said “a burst of growth” would be needed in the fourth quarter or first quarter of 2010. While investors have been disappointed in several economic reports recently that haven`t validated the 42 per cent run in stocks from March lows, she said the bank`s report “was taken between late May and mid-June and thus is more up-to-date on the state of the economy than most of the recent data flow.
“The survey has an even stronger correlation with economic activity stateside than for Canada,” she said. “If true, businesses may be getting a sense of better cross border order-flow that we have not yet seen in any hard data release, and we may see a better tone in those trade figures in the next couple of quarters. Certainly, the unusual jump in Canada railcar shipments in June and into July corroborates this possibility.”
The bounce, she warned, could be short-term. She has recently expressed concern that Canada`s central bank will snuff any recovery by withdrawing stimulus measures too soon.
“I`d say it`s almost guaranteed if we see pop in growth that we won`t see a sustained pop,” she said, as she recommended investors turn to cyclical stocks to benefit from the growth. “Investors may want to think about dipping their toes into cyclicals, although they are trades you maybe want to rent rather than own since I`m not sure we`ll see sustained growth.
While she raised the possibility of sharper-than-expected growth, she didn`t go so far as to change her outlook for the year. Her 3.8 per cent target puts her at the top end of the range of expectations – The Conference Board of Canada expects a contraction of 1.9 per cent while the International Monetary Fund has predicted Canada`s GDP will shrink 2.3 per cent this year.
Douglas Porter, a senior economist at BMO Nesbitt Burns Inc., said it would be possible for a quarter or two of rapid growth “if everything went absolutely perfect in terms of stimulus spending and recovery,” but cautioned the global economy is still on very shaky ground.
“Things were so very depressed that I wouldn`t be surprised if we saw a temporary bounce,” he said. “But the bigger question is whether that growth can remain robust for more than a quarter.”
A double-digit recovery wouldn`t be without precedent, Mr. Porter said. Singapore`s economy staged an unexpected recovery in the second quarter, with government data showing the economy grew at an annualized 20.4 per cent from April through June compared to the previous three months after double digit declines in previous quarters.
“I do think we`re going to start seeing things like this happening around the world in the coming quarters,” Mr. Porter said. “But there are still very severe headwinds for the global economy.”
Meanwhile, second-quarter growth figures from China to be released by Beijing on Thursday are expected to show the economy expanded 7.5 per cent in the second quarter.
“The Singapore economy is back and back with a vengeance,” Robert Prior-Wandesforde, senior Asia economist for HSBC in Singapore, told the Associated Press. “We very much doubt that today`s Singapore GDP release will be the last in Asia to provide a sizable upside surprise.”