What’s in store for Canada’s economy

Canada’s economy is on the brink. Since the country is in the late stages of the business cycle—key indicators are the record-long bull run in U.S. equities alongside North America’s low unemployment rates and rising interest rates—recent strong growth could either moderate going into 2019 or lead to inflationary pressure.

Deloitte Economic Advisory, in a new report, is betting on slower growth for 2019. This will be due to “weaker consumer spending and the impact of a slowing global economy, with U.S. protectionism still posing a key international risk,” it says.

The group of economists, consultants and analysts also expects “economic growth will slow to a more moderate and sustainable rate of expansion” by 2020, potentially dropping to 1.4%.

The new trade deal between the U.S., Canada and Mexico won’t help much. While it reduces possible risks, the experts forecast that America’s tariffs will continue to have “a negative, though limited, impact on global economic growth. However, if the tariffs are significantly expanded and other countries retaliate, the result could materially weaken the global economy—and this would feed through to Canada.”

The coming slowdown will follow strong 3% expansion in 2017, the report says, though last year also saw deceleration in the final quarters.

“This created a soft handoff heading into 2018, and economic growth was modest in the first quarter [of 2018],” it adds. The second quarter of this year saw some improvement, but the report notes that “consumers and real estate have been fuelling much of Canada’s gains” since the last recession.

Now that consumers are struggling with debt and housing has become unaffordable in major cities, the picture isn’t as rosy.

“Consumer spending should grow at a pace slightly below 2%, and new home construction is expected to soften in response to higher interest rates and weaker buyer demand,” the report says.

As well, businesses operating at high levels of capacity are likely to be cautious when it comes to investment. “This reflects business uncertainty related to U.S. protectionism, but also concerns about competitiveness. Investment in non-residential structures as well as machinery and equipment should increase, although not at a strong pace,” the report adds.

Moderation is also on tap for domestic exports, it says, “partly reflecting the loss of market share in many of Canada’s major export markets,” alongside waning U.S. demand.

A separate study from the Fraser Institute also highlights weak capital investment within Canada, which can weigh on economic expansion.

“The growth rate of overall capital expenditures in Canada slowed substantially from 2005 to 2017 compared to earlier periods. Furthermore, from 2015 to 2017, the growth rate was lower than in virtually any other period since 1970,” that study says.

Canada ranked well among developed countries between 2000 and 2010, the study notes, but “from 2010 to 2015, Canada’s investment growth rate dropped substantially below that of the United States and several other developed countries.”

As a result, “the future competitiveness and productivity performance of Canada’s business sector” is uncertain. The Fraser Institute study suggests that “improvements to the environment for business investment in Canada should be a priority for the federal and provincial governments.”

Access the full Deloitte report. Read the full Fraser Institute report.

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What to watch for in feds’ budget update

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