It's difficult to be a positive guy when you write about the economy every day. Especially over the past half-dozen years, even when the sun has broken through the clouds, it has often been hard to see through the dense forest of risks.
But it's the dawn of a new year, and time for a New Year's resolution – to view the Canadian and global economies on the bright side. Like all New Year's resolutions, I don't imagine I'll keep this one for long. (Case in point – it proved hard to do last year's pledged sit-ups every day with that bag of chips on my chest.) But at least for one column, let's talk about what could go right economically in the next 12 months.
Oil's plunge isn't so bad
The good news about oil's nearly 50-per-cent nosedive is that it is largely a supply story. The world woke up to the fact that it has more oil than it needs right now.
A supply-driven correction is very different (and less scary) than a demand-driven one. If oil is plunging because of, say, a global recession, there is probably less demand for oil regardless of price – if I've shut down my factory because there's no demand for my product, I won't be buying fuel to run my machines no matter how cheap it gets.
But when an oil decline is due to increased supplies, it's a whole different proposition.
If demand is rising and the underlying economy is accelerating, then cheaper prices for an essential input will add fuel to the economic fire.
That's the case right now in the United States, the world's biggest oil consumer. That faster growth should, ultimately, add to oil demand – which will help prices rebound.
Housing prices flatline – but don't plunge
When you look at past housing corrections, what's remarkable isn't the depth of the decline (10 per cent is about as big as it gets) but rather the long period of flat prices that follows. Much of the correction is simply standing still while economic and demographic growth catch up and bring prices more in line with fair value.
And remember that the Canadian housing corrections of the early 1980s and early 1990s were triggered by sharp interest-rate increases and accompanied by recessions – neither of which looks likely.
Even if the Bank of Canada begins what is expected to be a slow, gradual rise in rates in 2015, it won't be nearly enough to send home prices into a tailspin. Instead, we may be looking at a small dip, followed by a few years of sideways drift.
Canadian growth finds more solid footing
Oil and housing won't be driving Canada's economic bus this year – and that's a good thing. Both had outrun the country's underlying fundamentals, resulting in an economy so off-kilter that it looked like the Tower of Pisa, structurally questionable and forever looking set to tip on its side. Now, they are making way for a new wave of economic drivers: Rising export demand, investment in business expansion (due to aforementioned demand) and a resulting broader-based economic growth that won't rely on consumer debt and global oil prices to sustain it. The result will be a much healthier and more sustainable Canadian economic expansion – which will help everyone.
The loonie will be fine
If there's one good thing we've learned from Russia's ruble implosion, it's that the Canadian dollar, contrary to popular belief, isn't much of a petro-currency any more. Sure, it moves up and down in concert with oil, which is to be expected when you're an export-oriented economy and energy is your biggest export. But when world crude prices fell nearly 50 per cent from mid-June to mid-December, the loonie fell 6.5 per cent. As the U.S. economy gains steam and drives demand for more of Canada's non-energy exports, the oil story becomes a less dominant one for the currency. Once oil stabilizes, so will the dollar – at a level low enough to add some welcome support to exporters, but not so low as to be problematic.
Europe will get its act together
The European Central Bank is prepared to step in with a serious program of asset buying (i.e. quantitative easing) to stimulate the euro zone away from the brink of deflation, and with tumbling oil prices (even if they're transitory) pulling inflation downward, it just might be the spark for the ECB to finally act. At the same time, the oil decline is an unexpected gift for most of Europe – an influx of cash in consumers' pockets that can drive demand when other growth sources are still misfiring. These dual effects could finally lift Europe out of its hole.
Russia, meanwhile, will come to its senses – slapped there by the threat of a major economic and currency crisis. Helpless to do anything about oil's meltdown, and needing to get trade and foreign funds flowing again to stop the bleeding in the ruble, it will step back from Ukraine and pave the way for a removal of international sanctions.
The last point may be wishful thinking. But the new calendar calls for new hope, doesn't it? Happy New Year, everyone.