A year ago, as Canadian economists formulated their 2017 projections after the shocking presidential win of Donald Trump, they laced their narratives with the word "uncertainty," and moderated their forecasts to match – missing a much more robust Canadian economy this year.
Equity strategists were more optimistic, as arguably they often are, and saw an S&P/TSX composite, then just above 15,000, topping 16,000 before the year-end, which it has.
What, then, went wrong for the economists and right for the stock-watchers? As we have done in years past, we look back at the prior-year forecasts and try to figure that out.
The accompanying chart tells the tale of the economists at the big banks tightly bound in a consensus forecast with few outliers – and therefore, a set of numbers that included a number of misses, understating the strength of the Canadian economy. Projections for GDP growth ranged from 1.8 per cent to 2 per cent, while it's likely that when fourth-quarter numbers come out in early 2018, that number will push 3 per cent. Unemployment came in lower than expected, and the Canadian dollar much stronger – even as oil failed to rebound to the degree forecast.
"Looking back at it, I would be much happier if you were focusing on our forecast for the U.S., which was for the most part bang on," says Avery Shenfeld, CIBC's chief economist. "So of the two countries we focus on, we got one of them right."
Mr. Shenfeld says his economics group "completely missed foreseeing the big numbers put up by Canadian consumers in 2017, who looked to be too swamped in debt at the end of 2016 to generate the kind of numbers we ended up seeing. The result was that GDP growth in the first half of the year was miles above our forecast, enough to push the Bank of Canada into two rate hikes that wouldn't have been necessary if consumer spending had cooled off."
The rate hikes also supported a firmer Canadian dollar than projections, he says, since they avoided the loonie weakness that would have been seen had the U.S. Fed hiked rates and the Bank of Canada stayed put.
"If there's a lesson in this, it's that with interest rates so low, there was a lot more room for Canadians to dip even further into the debt well, and drive the savings rate lower, to sustain momentum in retailing and housing," he says. "Missing the household sector's willingness to borrow even more meant being too pessimistic on the near-term growth picture for Canada."
While CIBC forecast the successes in the United States while missing Canada's gains, Brian Belski, chief investment strategist for BMO Nesbitt Burns, argues Canadians failed to heed what a growing U.S. economy would mean for Canadians.
Mr. Belski forecast a S&P/TSX composite at 16,000 by year-end; with the index closing Friday at 16,209.13, he was very close, just as he has been more than once in the past several years. He has long had the belief that we are in the midst of a 20- to 25-year bull market, launched at the end of the financial crisis in 2009, and, as he says in his 2018 forecast, investors need to "overweight analysis" and "underweight rhetoric."
That, he says, was the mistake made by Canadian prognosticators.
"I believed the [economic] consensus and the Bank of Canada were too bearish heading into 2017," he says. "Why were they wrong? Economic statistics are backward-looking, and investments are forward-looking. Economic statistics were still dealing with the relative slowdown in 2016 and missed the fact of what was happening with not only the economy but also the stock market in North America. The U.S. and Canada are as aligned with respect to GDP and [corporate] earnings as they've ever been. So my theme for 2017 was 'as America goes, so goes Canada.' And we nailed it."
Specifically, Mr. Belski says, "The majority of Canadians hate President Trump, they led with their emotions, took their eye off the ball, and didn't understand and appreciate the fact that if the United States economy and stock market are doing well, Canada's doing well, period.
"Why was everybody so negative? Because of the fear and conjecture with President Trump during the campaign talking about NAFTA and tariffs … 'Oh, Trump's going to tariff the crap out of us and rip up NAFTA and it's going to be horrible,' and it's the default negativity of the average Canadian and certainly macro economists in Canada. Default to negative. So they missed the boat."