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(AFP)
(AFP)

Change yes, end of prosperity no: CIBC Add to ...

The coming decade will look much different than the last for the North American economy, but the radical changes brought on by the global financial crisis won't mean an end to prosperity for Canada, say economists at CIBC World Markets in a new report that blue-skies about the future.

"It's not as painful as some think," said chief economist Avery Shenfeld.

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The next 10 years will end the U.S. consumer's excessive reign as king of shopping, and that crown will shift to China and emerging markets, predict Mr. Shenfeld and his colleague Benjamin Tal.

"There's a tendency to believe that with the U.S. and Europe deep in debt, that we now have to punish global growth for the next 10 years," Mr. Shenfeld said. And what this is arguing is that there is actually a reservoir of potential spending that could hit the global economy from the developing world, where debt levels have not been excessive."

Instead of being known as the key source of global consumption, the U.S. economy will be notable for its high inflation rate, as authorities allow prices to rise in order to lower the burden of their massive debt, the economists argue.

That inflation will undermine the U.S. dollar, and turn the United States into an economy driven by exports rather than domestic consumption.

For Canada, the weaker U.S. currency, along with commodity prices pushed up by burgeoning Asian consumer demand, will mean a loonie that trades above par on a regular basis. The shift also means the deterioration of industries geared toward U.S. consumers, such as manufacturing, automotive equipment, newsprint and lumber, the report says.

But it doesn't mean Canada and the United States will be confined to a decade of low growth.

"Excess leveraging in this decade needn't mean the deleveraging dooms us to lower potential overall gross domestic product growth," the authors say.

They liken the economic landscape of 2010-2019 to the teenage years of a lifespan, during which the economy could be moody and unpredictable at first, but eventually grow and mature.

"The U.S., and perhaps to a lesser extent, Canada, will become a bit more China-like in the teen years. We'll see more of a contribution from exports and related capital spending, and less from housing or consumption," Mr. Shenfeld said.

He expects the countries that have been chronic savers over the past decade - especially China and Asia in general - will become the spenders of the coming 10 years. And their consumption will more than make up for the retrenchment of U.S. consumers, especially as the stronger currencies drop their pegs to the U.S. dollar, allowing for an improvement in purchasing power among households.

At the same time, he thinks the United States will allow inflation to climb to about 5 per cent in the early part of the decade, allowing the government and consumers to dig their way out of their debt problems.

The U.S. Federal Reserve Board has a dual mandate of promoting full employment and also keeping inflation low, so it may well look the other way and allow inflation to climb, if it helps growth, Mr. Shenfeld said in an interview.

"To the extent that a dose of inflation for a couple of years could promote growth by reducing the drag of the debt, that could still be within their mandate."

A weaker U.S. dollar, higher U.S. inflation and growing Asian demand will all boost commodity prices, and inspire more investment in Canada's oil sands, natural gas and metal mines, the report says.

(Mr. Shenfeld, who has recently taken over from Jeff Rubin as chief economist at CIBC, did not repeat his predecessor's claims that oil would rise to $200 [U.S.]a barrel, but did say he expects oil to rise above $100 in the next two or three years, with base metal prices in parallel.)

Exports of technology and materials will also flourish in Canada, while financial services should "earn their keep" by helping Canadians manage their growing savings.

Canada has already begun the transition away from manufacturing and U.S.-oriented exports, Mr. Shenfeld noted, and has become more dependent on the global economy's demand for natural resources.

"Add it up, and the teen years will, like teenagers, have a lot of drama," Mr. Shenfeld said.

His thesis requires a fundamental change in the mindset of consumers in both the United States and in China, he conceded. Americans need to jettison their spending ways and embrace saving, and Chinese consumers need to stop saving for rainy days that probably won't materialize.

"The average Chinese household for the last 10 years was still adjusting to the notion that the economy isn't going to go back to the days of the poverty of some of the previous regimes," Mr. Shenfeld said.

But there are signs that change has begun to take root, he added. The U.S. savings rate has moved from zero to about 4 per cent of personal disposable income nowadays, he noted, and neither borrowers nor lenders in the United States are ready to support the conspicuous consumption of times past.

In Asia, Indian consumers have loosened their purse strings, while Chinese households have shown the beginning signs of embracing more consumption.

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