Recent tragic events in Japan have added to growing concerns about the strength of the recovery, but should not push either the Canadian or global economies back into recession, according to a major Canadian bank.
In fact, in its latest monthly report, CIBC World Markets predicts growth will remain relatively strong in Canada despite a slowing in many other countries due to rising oil prices and restraint in government spending.
While Canada is not immune to issues facing the global economy, the report forecasts real GDP growth of 4 per cent for the country in the first quarter of 2011.
As a result, CIBC senior economist Peter Buchanan expects the Bank of Canada to hike its trend-setting overnight rate as early as May.
Until now, most analysts have been predicting the bank would hold off on a rate hike until at least midyear.
The CIBC World Markets report said it will take time before information is available to make a complete and accurate assessment of the implications of the events in Japan, including the crisis at its Fukushima Dai-ichi plant nuclear plant following last week's massive earthquake and devastating tsunami.
However, the report notes that the global economy was already facing increased uncertainty on a number of fronts even before last Friday's disaster.
"After riding some strong tailwinds late last year, the global economy finds itself buffeted by new and, in some cases, completely unforeseen developments," Mr. Buchanan wrote.
"While the risk of outright recession would still appear to be quite low, those developments have led to a scaling back of earlier optimism and an increase, for now at least, in risk aversion."
Among other things, Buchanan notes that surging gasoline prices raise questions about whether U.S. consumer spending can continue its increasingly healthy pace.
Meanwhile, "with the focus on containing red ink, governments in the industrialized world are reaching for the spending axe."
However, Mr. Buchanan believes that oil prices would have to reach $160 a barrel to derail the economic recovery, a scenario he does not see playing out. In early trading Thursday, crude was up $1.93 at US$99.91 a barrel.
"Oil has risen dramatically before, only to crash back to earth, and there are still good reasons why history may repeat itself," Mr. Buchanan said.
Inventories in industrial countries were adequate when the Middle Eastern political pot began bubbling and OPEC, while it likes firm prices, has no interest in recession-inducing ones that crush demand.
Meanwhile, "strong but not sky-high oil prices are also best for the Canadian economy," he said.
"The Canadian dollar followed crude north in the 2008 spike only until prices hit $100 a barrel. That would seem to suggest that for Canada the negative effects of costlier oil, like weakness in trading partners and auto sales, begin to increasingly outweigh producer rents once prices reach triple digits."
Since Canada is one of the world's top dozen net exporters of oil and oil products, higher crude prices are a modest plus for the economy in the near term. But beyond four to five quarters, the bad more than cancels the good, and the level of GDP is actually lower than it would otherwise have been.
The report also notes that in addition to higher oil prices, global growth is also being dragged down by increased government fiscal restraint, particularly in the United States.
"Although rising debt levels will result in dramatically higher interest payments over time, cutting spending sharply while the economy is still recuperating is not without risks," Mr. Buchanan said.
The negative impact of oil price hikes and government cutbacks has seen CIBC's forecast for 2011 U.S. GDP growth drop a tenth of a point to 2.7 per cent.
Another risk to global growth is the fact that emerging market economies are likely to increase monetary tightening and other restraint measures to tackle inflation to ensure long-term price stability.
"That will cool performance in what, to this point, have been some of the world's hottest performers," CIBC said. "While those economies are unlikely to sink into recession, growth simply won't surprise to the upside the way it has in recent years."