Escalating trade tensions, rising oil prices and higher interest rates are starting to erode synchronized global growth. Beata Caranci, Chief Economist, TD Bank, talks to Kim Parlee about how these events may play out, and what is in store for the rest of the year and beyond.
Earlier today, I spoke with Beata Caranci. She's Chief Economist at TD Bank. And here is that conversation.
There probably hasn't been a more challenging time to be a forecaster in economics than it is now, because tweet by tweet, minute by minute, so many material things, I say, it looks as though they're changing. But having said that, your forecast has come out. You look at the world, you look at the US, you look at Canada, which we'll get to. But I want to start from the big picture-- the world. We've always talked about synchronous growth. You have a quote here, go your own way.
Tell me about that.
Yeah, so what we're seeing-- so the last couple of years, we saw a lot of global synchronicity in the growth rate. So an acceleration of even the European region, the US and Canada, all simultaneously. So everybody was able to hold growth at between 2% and 3%. In fact, Canada last year was the strongest G7 economy at 3% in growth.
Now what we're seeing is a little bit more of a fraying on that side. So the US is proving to be the strongest economy, probably about 3% growth. Europe had five really bang out quarters where they were growing at a pace that was more than double their potential. And so that's starting to, what we call in economics, normalize. There's natural, structural pulldowns to what your running speed is. So they're are going to be more in a 1 and 1/2 to 2% range.
And Canada, as we know, saw some loss of momentum towards the second half of last year and into this year. And so we're also going to be in that around 2% or slightly below range, as well.
So everybody is not showing that same vigor that was coming through, with the exception of the US, because of a lot of fiscal stimulus. And then one of the other distinguishing features is emerging markets are facing some unique issues. Some speculative attacks being placed on countries like Turkey and Argentina, and countries that have very large foreign debt ownership as well as low foreign reserves to pay it. And so we're starting to see a bit more of a discerning investor come through with regards to risks.
Speaking of discerning investors, people are also becoming a little more discerning, I think, with the news flow, in terms of trade and tariffs because we saw, in terms of equity markets-- and not that they're the be all end all, but-- somewhat immune, I'd almost say, in terms of what was going on. And that seems to have shifted in the past little while in terms of like, oh! This $200 billion of tariffs. This one might be the tipping point in one sense.
Tell me about, from your perspective, G7. Everything the US is doing. We're talking steel, aluminum now auto tariffs. When do you go, yep, now this changes the game.
Yeah. So far, what we've seen, it's certainly like shaving growth off from a global perspective. But has not undermined it. And because there's significant enough domestic drivers at play. So an example would be is, it's not just the aluminum and steel, but we've also seen a rise in gasoline prices. Iran sanctions have been an influence on that front. Also, Venezuela is having trouble on the production side.
So these things are happening all in concert with one another. And if you do see the auto tariffs come through, it's under investigation by the US, with a determination to be made in 2019. But if that were to come to-- at that point, we're saying, you're probably looking at 20 to 30 basis points of growth at risk, which would mean that you would be pulling your global growth pattern back down to what we would have seen a few years ago.
So 20 to 30 basis points worldwide.
Yes. And now, different for Canada, obviously, because of a high export exposure in this, and in particular for Ontario, it could prove recessionary for Ontario because we have 40% of our exports in the auto sector. It would depend on how, if the US does it, the rates that they would apply and in what segments, because it makes a difference whether it's auto parts versus the final product of the car. So it's not even clear in terms of how it would be implemented. So we can't actually build it into the forecast because it's still not actualized, and it's not clear, even when it is, what form it would take.
I'm going to come back to Canada because I think probably everyone agrees, we do not know the exact details. It's bad if it happens in terms of the economy. Just going back to the States, though, for a second. 3% growth, I think is what you're seeing for the balance of this year. And pretty good numbers. What they're doing right now-- we've seen a lot of deregulation, we've seen of course the tax cuts, repatriation, all that good stuff. But they have also just released, I believe-- the White House came out with their budget. So there's just a lot of moving parts. Are you confident in the growth forecast for the States going ahead?
I would say for certain over the next 12 months, the near-term data is certainly positive and the momentum is picking up.
As we get into next year and the year after, our forecast does have 3% for this year and not too far off, 2.67 for next year. But when you look at the pattern, it's actually slowing towards the bottom end of 2% as the year goes on. And that's because the fiscal stimulus impulse starts to fade. They are approaching what we would define as a fiscal cliff, because they had budget measures come through that need to be unwind.
And to your point, there may be new budget measures coming through. So we just had the White House release their budget. It doesn't mean anything in terms of whether it'd be enacted or not. Often, it's not. It has to be something coming out of the Congress and agreed to. But now, they're putting forward over $6 trillion in cuts over 10 years. And a lot of that falling into areas of Medicare, Medicaid, other areas of discretionary spending. So that would be a net drag in terms of depending on how it was laid out. But obviously, at this stage, there is a push and pull factors of what they've done in the past on tax cuts, which starts to fade over time, versus what they still have to do to rein in deficits and debt, which are definitely on the watch list. Because they're steadily rising, and when you look at where they're going over the next 10, 15 years, US debt levels will actually be not far off from where Italy is in terms of debt to GDP ratio