By: Alex Carrick on August 25th, 2016

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On Autumn’s Doorstep, an Assessment of Canada’s Economic Outlook

Economic News

Canada has been experiencing more months of declines in ‘real’ (i.e., inflation-adjusted) gross domestic product (GDP) so far in 2016 than increases. According to Statistics Canada, February (-0.1% for industry-based GDP month over month), March (-0.2%) and most emphatically May (-0.6%) acted in counterpoint to January (+0.5%) and April (+0.1%).

2016-08-25-Canada-GDP-Graphic

A hesitant and stuttering world economy has been suppressing globally-traded commodity prices since the Great Recession (2008-2009), but July 2014 was when the bottom really began to fall out. That was when the price of crude oil started its dizzying plummet from over $100 USD per barrel to as low as $30 near the kick-off to this year.

More recently, crude has moved back up to between $40 and $50 USD per barrel, with the occasional sortie above the upper limit of that range. If it were to stay above $50, Oil Sands producers, the Premier of Alberta and the Chairman of the Bank of Canada would be dancing with joy.

The past many years of depressed commodity markets have served one major purpose. Either through shutdowns or a lack of new investment, they have led to supply shrinkages that are finally helping to firm up prices. Modest upswings in demand for raw materials, which will be accompanied by further price improvements, combined with the foreign trade advantages that result from a weakly-valued ‘loonie’ (i.e., relative to the U.S. greenback), will lead to Canadian GDP growth in 2017 (+2.3%) and 2018 (+2.3%) that outpaces 2016 (+1.3%) and 2015 (+1.1%).

Many of the projections for the economic variables in Table 1 should be viewed relative to the performances of their U.S. counterparts. For example, the higher unemployment rate north of the border suggests there will be less upward pressure on Canadian ‘core’ (i.e., omitting mainly energy and food products) inflation originating with wage rate increases.

With respect to ‘all-items’ inflation, however, Canada will be impacted harder by its larger foreign trade dependency and especially by the fact that import prices are biased upwards when the value of the loonie is much lower than the U.S. dollar (i.e., under 80 cents USD).

Year-over-year nominal employment advances in the U.S. are predicated on forecast increases of +2.0% in 2016, +2.0% again in 2017 and +1.5% in 2018. The long string of successes in creating more U.S. jobs must eventually wind down. Canada’s annual gains will follow an opposite trajectory, moving from slower to faster: +0.7% in 2016, +1.0% in 2017 and +1.5% in 2018.

Job prospects in Canada, which are currently struggling to break free, will eventually shine again as a result of two primary developments, a gradual improvement in world trade that will see a resumption, in stages, of resource mega project construction and work getting underway on a slew of major infrastructure projects as promised by Prime Minister Justin Trudeau’s federal government.

Household consumption expenditures in Canada will continue to be slower off the mark than in the U.S. Motor vehicle sales, which are a major component of durable goods orders, have recently been setting all-time highs. That strength can’t be expected to endure indefinitely.

Monthly housing starts in Canada have been staying near a buoyant 200,000 units annualized, but relief on the affordability front remains elusive. House prices have skyrocketed in a couple of major cities, notably Vancouver and Toronto. The B.C. provincial government has adopted measures to reduce demand through a tax on sales to foreigners and penalties for property owners who allow their homes to stand vacant.

Ontario’s government has been signaling that, if pushed to take direct action, it will be similarly inclined to tackle demand-side as opposed to supply-side issues to resolve the exorbitant resale-home-pricing predicament.

As a result, Canadian new home starts are forecast to soften in 2017 and 2018 and residential investment will moderate in tandem, although it is important to keep in mind that there is a large component of the latter that is renovation activity separate from groundbreakings.

Investment in nonresidential structures will be driven by such factors as low office vacancy rates in some centers, − although not in Calgary where the energy sector crash has created so-called ‘see through’ buildings – by capacity utilization rates that are inching up and by marginal improvements in commodity prices that will help bring capital spending ‘back from the dead’.

Canadian machinery and equipment (M&E) purchases are traditionally less robust than in the U.S. This frustrates hopes that Canadian producers may be able to match American productivity gains. For Canadian companies, there’s also the drawback that the lower-valued loonie makes import acquisitions pricier. Magnifying the problem is the dilemma that Canadian M&E purchase orders are heavily weighted towards imports from the U.S.

Canadian net exports sales, with the nation’s central bank keeping its fingers crossed, must inevitably begin to pick up again. When that happens, it may be partly due to the foreign sales efforts of manufacturers, but it’s more likely to result from a revival in global trade that benefits the raw materials sector.

Historically, when commodity prices (especially for oil) make headway, the value of the Canadian dollar improves as well. There is potential for a considerably higher value loonie by the year 2018 than is shown in Table 1 (i.e., back into the $0.80 to $0.85 USD range.)

Finally, the Bank of Canada wants no part of a rate hike at this time. Featuring a devastated oil sector plus the worst natural disaster in the country’s history, – i.e., the wildfire that swept through parts of Fort McMurray in Alberta − 2016 has been a year of unwelcome trials.

For the decision-makers at the BOC, their tool of choice is monetary stimulus all the way, at least until the U.S. Fed gets too far out front with rate hikes and a response in kind, to some limited degree, becomes mandatory.

Table 1: Canadian Economic Outlook - Fall 2016
ACTUALS  
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010              
(year-over-previous-year per cent change in annual average value)
Real GDP: 5.2% 1.8% 3.0% 1.8% 3.1% 3.2% 2.6% 2.1% 1.0% -2.9% 3.1%              
Household consumption expenditures 4.0% 2.4% 3.9% 2.9% 3.2% 3.9% 4.2% 4.6% 2.8% 0.1% 3.7%              
Durable goods 7.1% 3.7% 8.6% 3.3% 2.6% 4.8% 6.8% 6.5% 5.3% -3.0% 4.9%              
Residential structures 4.4% 11.3% 14.5% 3.6% 9.2% 3.5% 2.3% 3.4% -5.1% -6.5% 8.4%              
Nonresidential structures -1.0% 4.3% -4.6% 5.9% 7.3% 8.4% 11.0% 2.3% 7.8% -19.4% 17.3%              
Machinery & equipment 6.5% -4.4% -4.9% 7.5% 10.9% 14.1% 10.8% 3.0% 0.1% -21.2% 10.4%              
Intellectual property products 17.7% 10.8% -7.4% 6.1% 8.0% 10.7% 0.4% 1.7% 3.4% -17.7% 10.4%              
Exports (goods) 9.1% -3.4% 0.7% -1.8% 5.3% 2.1% 0.8% 1.4% -5.3% -14.9% 8.4%              
Imports (goods) 8.8% -5.2% 1.7% 3.4% 8.6% 7.6% 5.4% 5.5% 0.3% -14.4% 14.0%              
Consumer price index – (year-over-previous-year per cent change in annual average index value)
All items 2.8% 2.5% 2.3% 2.8% 1.8% 2.2% 2.0% 2.2% 2.4% 0.3% 1.8%              
Core 1.3% 2.1% 2.3% 2.2% 1.5% 1.7% 1.9% 2.1% 1.7% 1.8% 1.7%              
  (annual average per cent level)
Unemployment rate 6.8% 7.2% 7.7% 7.6% 7.2% 6.8% 6.3% 6.0% 6.2% 8.4% 8.0%              
(year-over-previous-year, thousands of jobs based on annual average level)
Employment change 358 173 348 369 267 205 275 373 229 -272 238              
  (year-over-previous-year per cent change in annual average value)
Corporate profits (pre-tax) 33.4% 12.2% 12.2% 11.7% 20.9% 18.5% 0.6% -3.2% 12.5% -28.8% 31.2%              
(thousands of units)
Housing starts 151.7 162.7 205.1 218.4 233.4 225.5 227.4 228.3 211.1 149.1 190.0              
(million of units)
Light motor vehicle sales 1.588 1.598 1.733 1.626 1.575 1.630 1.666 1.691 1.674 1.485 1.584              
Bank of Canada (annual average percent level)
Overnight rate 5.46% 4.08% 2.46% 2.94% 2.25% 2.67% 4.06% 4.35% 2.96% 0.40% 0.60%              
U.S. $s bought with (annual average)
$1 Canadian $0.673 $0.646 $0.637 $0.714 $0.768 $0.825 $0.882 $0.930 $0.937 $0.876 $0.971              


ACTUALS FORECASTS
                    2011 2012 2013 2014 2015 2016est 2017 2018
(year-over-previous-year per cent change in annual average value)
Real GDP:                     3.1% 1.7% 2.2% 2.5% 1.1% 1.3% 2.3% 2.3%
Household consumption expenditures                     2.2% 1.9% 2.4% 2.6% 1.9% 2.2% 2.1% 2.0%
Durable goods                     1.6% 2.8% 4.0% 4.3% 2.9% 4.5% 1.8% 1.4%
Residential structures                     1.6% 5.6% -0.4% 2.5% 3.8% 4.0% 0.0% 2.0%
Nonresidential structures                     15.9% 12.4% 7.8% -0.4% -14.7% -16.0% 6.6% 6.0%
Machinery & equipment                     8.5% 2.7% -6.7% 1.0% -2.4% -7.0% 2.8% 3.0%
Intellectual property products                     5.7% 0.1% -5.2% -4.2% -12.0% -6.0% 1.8% 2.0%
Exports (goods)                     5.0% 2.5% 3.0% 5.7% 3.7% 4.5% 5.0% 6.0%
Imports (goods)                     5.9% 3.2% 1.8% 2.4% 0.3% -3.0% 2.5% 3.5%
Consumer price index – (year-over-previous-year per cent change in annual average index value)
All items                     2.9% 1.5% 0.9% 1.9% 1.1% 1.5% 1.6% 1.8%
Core                     1.7% 1.7% 1.2% 1.8% 2.2% 2.1% 2.2% 2.3%
  (annual average per cent level)
Unemployment rate                     7.5% 7.3% 7.1% 6.9% 6.9% 7.2% 7.0% 6.9%
(year-over-previous-year, thousands of jobs based on annual average level)
Employment change                     254 221 242 111 152 131 173 274
  (year-over-previous-year per cent change in annual average value)
Corporate profits (pre-tax)                     14.5% -0.7% 8.6% 7.4% -8.5% -11.0% 12.0% 8.0%
(thousands of units)
Housing starts                     194.0 214.8 188.0 189.3 195.5 202.5 192.0 192.0
(million of units)
Light motor vehicle sales                     1.621 1.717 1.776 1.890 1.938 2.000 1.900 1.850
Bank of Canada (annual average percent level)
Overnight rate                     1.00% 1.00% 1.00% 1.00% 0.63% 0.50% 0.60% 1.40%
U.S. $s bought with (annual average)
$1 Canadian                     $1.011 $1.001 $0.971 $0.905 $0.810 $0.758 $0.769 $0.769
Data sources: Bureau of Economic Analysis (BEA), Housing and Urban Development (HUD) and Department of Labor.
Forecasts and table: ConstructConnect - CanaData.