Brexit ‘ dampening outlook for U.S. exports’

All bets off for near term in North America

OTTAWA • First, the good news. The U. S. economy performed a lot better in the first quarter of 2016 than previously forecast, and Canadian GDP growth is now forecast to edge ahead in April — setting an initial optimistic tone for the second quarter.

Now, the bad news: With the impact of the Brexit vote to leave the European Union setting in — accompanied by dire projections of a U. K. recession — all bets could be off for near- term growth in North America. It also shelves plans by the U.S. Federal Reserve to push ahead with its already-detailed plan for interest rate hikes, and likely leaves the Bank of Canada firmly on hold for a lot longer than planned only a few weeks ago.

With details and timing of the U. K. break from the EU still unclear, there is “a heightened degree of economic uncertainty that is likely to slow economic growth in the U. K. and in continental Europe,” HSBC Global Research said in a report Tuesday.

“Brexit, by dampening the outlook for U. S. exports, lessens the chances of a sustained rebound in orders for capital equipment and for a pickup in business investment spending later this year,” HSBC said. “This lessens the need for the Federal Reserve to lift the nominal funds rate.”

HSBC now expects the U.S. Fed to delay raising its key lending level until December — one year after the central bank’s initial relaunch of rate increases after a sevenyear lull. The Fed rate is now at a range of 0.25 to 0.5 per cent.

The U. S. economy rose 1.1 per cent on a revised annualized basis between January and March, the Commerce Department reported Tuesday, which beat forecasts of one- per- cent growth. Many forecasters have predicted GDP of 2.5 per cent in the second quarter — but those forecasts were made pre-Brexit.

In Canada, growth came in at an annualized pace of 2.4 per cent in the first quarter and many economists expect April GDP of about 0.1 per cent. But following the optimist outlook for that month, the devastation of the wildfires in Alberta is expected to push second quarter GDP down by an annualized 1.5 per cent, before rebounding in the third quarter.

Uncertain outlooks domestically and globally will likely keep the Bank of Canada’s key interest rate on hold at 0.5 per cent well into 2017.

Emanuella Enenajor, senior economist at Bank of America Merrill Lynch Global Research in New York, is forecasting overall U. S. growth of 1.8 per cent both this year and 2017, while Canada’s economy is estimated to grow 1.4 per cent in 2016 and 1.7 per cent next year.

“There is so much uncertainty with Brexit. Clearly, the world has become a much more uncertain place. And it seems that there have been a number of global shocks. Typically, during a recovery, you can brush these shocks off,” Enenajor said.

“But this time around, it does appear that shocks are having much more of an impact because the world is more interconnected and growth is so much slower. And so these little shocks do matter,” she added. “But we don’t exactly know, with any certainty, what the economy may look like six to 12 months from now. So, we’re really shooting in the dark here.”