• We provide a list of concerns — a dozen of them — for the outlook for the global economy in the next 12 months

A LIST OF CONCERNS — A DOZEN OF THEM

1. China is overheating and more policy tightening will likely be needed.
When government officials begin discussing price controls, you know the
situation is serious.

2. The European debt crisis. If the contagion reaches Spain, it would likely
be game over for the euro.  The Spanish bond market is behaving similar
to the Irish market around the time of the Greece bailout.

3. QE2. It is too early to judge whether it is a success or a failure.  If the aim
was to kick-start the equity market, then all we can say is that so far all
QE2 has done is help bring the S&P 500 to the high end of a broad 1,000-
1,200 band, which has been prevailing for 14 months now.

4. We remain concerned that Canada experienced some sort of housing
bubble in 2009 and into 2010.

5. Renewed housing deflation in the United States. The problem of excess
supply has improved enough to forestall another down-leg in national
home prices.  Median new home prices have collapsed at nearly a 30%
annual rate over the past four months and resale values in the existing
home market are down almost 20%.  Nowhere was this fact cited in the
press, which instead focuses myopically on Black Friday shopping, and
possibly missing a very big story here.

6. Canadian household leverage — debt ratios are as high as they were in
the U.S.A. at the peak in relation to income.

7. Lack of productivity growth in Canada. This is a key source of debate —
but we contend that the U.S. data are overstated and the Canadian data
are understated.

8. The Canadian dollar. In our view, it is still overvalued by a nickel even with
the recent firming in the commodity complex, though strong international
capital inflows are providing a very firm floor under the loonie.

9. The dramatic retrenchment at the state/local government sector south
of the border and the negative feedback effects on domestic demand.
This is the one critical source of downside risk for the U.S. economy in
2011, which could easily result in 1.5-2.0 percentage points of withdrawal
from GDP growth.

10. Currency wars.

11. Military skirmishes. The two Koreas as an example but the situation will
also test China-U.S. foreign relations as Beijing tells America to butt out.  In
recent months, China has been making strides to deepen its economic and
strategic relationship with North Korea despite American objections.

12. Downside risk to the consensus view of global growth of 4.2% next year.
It does not seem to me that economists have fully taken into account the
drag from the fiscal side of things in the U.S. and in the Euro region. 
Global GDP consensus has been at 4.2% for several months.  Interestingly,
the BoC took down their 4% view to 3.5% last month — so they could be
ahead of the pack.

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