Once again I am writing my final post of the year at the last minute so please forgive the inevitable grammar and punctuation mistakes. I am just typing it and posting it.
Last year’s predictions ended up being almost entirely wrong. I had underestimated the ability of the American government to delay things so the Keystone XL pipeline was neither approved or denied. It is still in limbo. So no predictions there this year other than I think they have to come to a decision.
The overnight rate of the Bank of Canada remained at 1% for the entire year so that prediction held up. We are now looking at 2.1% core inflation which is slightly above the 2% target. This by itself does not mean that the overnight rate is going to be raised but there are a few other things the BoC will be keeping an eye on.
Oil prices are extremely low as you have probably noticed as you purchased gas 40% cheaper than you did last year. This will drag the Canadian dollar down with it. A weaker Canadian dollar means that all of our exports become cheaper to other countries. Canada does sell a lot of oil but it only accounts for about 3% (in 2009) of our GDP. Overall, then, we should see a good growth rate for the economy. This means that companies will start to spend the billions in cash they have been sitting on for the last few years, traditionally this would lead to inflation. With the inflation rate already over target I expect we will see an overnight rate increase this year. Poloz (BoC Governor) has made some comments about the strength of the Canadian dollar but that is just central banker talk. It is not the policy of the BoC to try to defend the price of the Canadian dollar so they could not mention that as a factor in the raising of rates. Raising interest rates makes your local currency stronger, but since you are a reader of this blog, you knew that.
Mortgage rates are always a topic of concern in Canada. People have been talking about the real estate bubble in Vancouver for 10 years. Mortgage rates normally follow long term bond rates rather than the overnight rate but you can expect a rise from the BoC to have a knock on effect on all Canadian lending markets if it done early in the year.
Last year I predicted that Russia would crack down severely on terrorists and that maybe this would lead to some countries boycotting the Olympics. None of that happened. Instead, Russia annexed/invaded parts of the Ukraine and is still currently involved in fighting there. NATO has done nothing militarily but did apply sanctions on Russia. When oil prices dropped so did the Russian currency, by 40% or more. Their central bank decided the best way to defend the value of the rubble was with their control of the interest rate. The first move was to 10% and then to 17%, a massive, massive increase. The currency seems to have stabilized for the moment. All the Russian companies that are holding debt in Euro and Dollars are going to have a really rough time this year. Expect to hear of at least some defaults. As a reference, the last time the interest rates in Russia were this high was in 1998, right before the government defaulted on all its debt.
For our neighbours to the south this should be an interesting year. Democratic Obama now has to deal with both the Congress and the Senate run by the Republicans. I think we have already got a little glimpse of this plan for the next two years. If he was smart he would continue to push these huge issues to the Congress and Senate for the next two years. Education reform , military spending, entitlements. Huge issues that have been completely deadlocked. If the Republicans try to block everything he does then they will easily lose the next election. They will be forced to concede on at least a few issues. Not only that, the Republicans will have so little time to properly build their feigned outraged narrative and catch phrases for each individual move they will probably have to drop back to some nonsense about King Obama and the only people believing that will always vote Republican anyway. I really hope they do something positive down there. Their political system has looked pretty ridiculous for a number of years now. It is time for them to gain some self awareness and fix some of their issues.
Wow, this is getting to be a long post. Ah well.
There will be a federal election in Canada this year. Low oil prices will drop a few billion off the revenue side of our balance sheet this year. The Conservative government has pulled a pretty smart move with their recent income splitting changes. This will reduce the amount of surplus, if there is even going to be one this year. This is smart because in an election campaign there is nothing that opposition parties like to do more than to tell everyone how they will spend the extra money that is sitting in government coffers. Low oil prices and income splitting should eliminate any extra money so any promises made during the election will have to be offset with a cut to another program. Not that this will stop anyone from making vague statements like “this will be paid for by savings generated by making X process more efficient” but there is not much we can do about that.
That is it for me this year. Thanks for reading for another 365 days. Until we meet again in 2015, have a happy new year.