Canada’s 2019 Economic outlook: Challenges, concerns and modest growth

For 2019 and beyond, Canada has several concerns and challenges regarding its economic outlook. The Bank of Canada points to some markers and several areas of uncertainty — the persistence of the crude oil -price drops, the extent of its impact on non-oil-producing regions, how household spending adjusts to previous interest-rate hikes, tighter mortgage rules, and global trade developments such as the U.S.-China conflict.

By Max Singh

For 2019 and beyond, Canada has several concerns and challenges regarding its economic outlook. The Bank of Canada points to some markers and several areas of uncertainty — the persistence of the crude oil -price drops, the extent of its impact on non-oil-producing regions, how household spending adjusts to previous interest-rate hikes, tighter mortgage rules, and global trade developments such as the U.S.-China conflict. “The drop in global oil prices has in particular, a material impact on the Canadian outlook, resulting in lower terms of trade and national income.” The bank said. The following issues are the most important in regards to Canada’s economic performance for 2019

Canadian Provincial outlook:

The party is over for the days of high oil prices that helped sustain growth from 2011 to 2014, – for Alberta, Saskatchewan and to a lesser extent – Newfoundland and Labrador. Oil tax revenues and high employment all led to boom times, particular in Alberta. However, the sudden decrease in oil prices from 2015 has led to stagnation. The Alberta oil patch is no longer the province to move too for high paying jobs. Alberta’s recently announced oil production cuts will affect the province’s finances in 2019.  Ontario with its diversified manufacturing sector hopes to fare better, while British Columbia is suffering from a now rapidly sliding real estate market that once fuelled its phenomenal growth, and is looking for tourism and immigration to continue its growth.

 

“The  disconnect with the U.S., our largest trading partner under Donald Trump,  tensions with China,  oil price collapse, Brexit, a stagnant housing market, jittery private investment, and runaways consumer debt are all playing a role in  providing concern for the long haul.”

 

U.S. and China Trade Wars:

The world’s two largest economies, the United States and China, have an iceberg effect on the Canadian economy, Both countries are our top two export destinations – and neither is giving Canada a comfortable ride with tit-for-tat tariffs on items such as softwood lumber and aluminum exports to the U.S. and a possible embargo on Canola seed shipments to China (Due in part to diplomatic issues.). Trade wars and disputes harm exports and create an imbalance of import to exports.

U.K. and Brexit:

The United Kingdom is Canada’s third-largest trading partner, accounting for just more than 3 percent of exports. The uncertainty of a Brexit deal is unnerving to Canadian exporters, and with the U.K.’s economy in a slide, any hard Brexit would have a significant negative impact in trade between not only Canada and the U.K., but Canadas’s other trading partners in Europe – such as Germany and France.

 

A stagnant Housing market:

The halcyon days of low-interest rates and a red hot real estate markets in much of Canada between 2015- 2017 led to more consumer spending and hence more household debt. In 2018 the Canadian government, along with Provinces such as B.C. and Ontario enacted such measures as tighter mortgage rules, higher interest rates, and new foreign-buyers taxes (As high as 20% in B.C.) to cool a runaway housing market. These measures have had the desired effect, deflating the housing market and denting consumer debt. The flip side to this is, of course, a stagnant housing market, that affects other businesses, and that may take some time to recover.

However wages have not kept pace with inflation and cost of living. In areas such as Vancouver this is exacerbating the issues such as housing affordability and the flight of highly skilled tech sector workers to more affordable places, contributing to a “brain drain” of talent.”

Private investment:

Canadian Corporations have identified uncertainty about access to the U.S. market, more stringent environmental regulations, diminishing tax competitiveness compared with the United States and a lack of skilled labour as important factors hurting investment intentions. However, a new trade agreement with the United States and Mexico, and the federal government’s recent move to accelerate the capital costs allowed for investments in machinery and equipment should help offset some concerns. Economic expansion remains broad-based, with investment and exports picking up steam. So far, exports are up 2% compared with a year ago. While services and goods exports have grown, the latter hasn’t kept up with foreign demand.

High Employment, but a lack of workers:

The Bank of Canada says Canadian jobs grew by 219,000 jobs over the last twelve months, the majority in full-time positions. More jobs are suitable for consumer spending, which has been slowing as interest rates rise and people pay down their bills. However, wages have not kept pace with inflation and cost of living. In high-cost housing areas such as Vancouver this is exacerbating  issues such as the flight of highly skilled or tech sector workers to more affordable places, contributing to a “brain drain.”

New Technology needed to spur growth.

A recent Business Development Canada study found out that around 40% of Canadian small and medium-sized businesses are struggling to find the people they need to grow. This limits their growth and will eventually impact the economy. The BDC says business owners need to get creative to find the talent they need to continue to remain competitive, as technology is the second big trend that will continue to affect Canadian entrepreneurs. New technologies are transforming business models and requiring additional investment efforts.

Another recent BDC study found that only 19% of Canadian businesses are digitally advanced. This is a huge missed opportunity as digitally advanced companies are 62% more likely to have enjoyed higher sales growth than all other companies over the past three years.

Controlling interest rates:

The Bank of Canada is raising interest rates more slowly than in the U.S., and this means that the exchange rate will remain low. Overall, the loonie is expected to trade within a range of 75 to 80 cents against the U.S. dollar in 2019. The bright side of a lower loonie is that Canadian export goods are cheaper and tourism gets a boost. The Bank of Canada says it will continue to do a balancing act on rates to keep household debt in check while maintaining the growth engine running.

 

Not All Gloom and Doom:

The BDC says Canada’s economic outlook is not all gloom and doom. “Looking ahead, exports and non-energy investment are projected to grow solidly. Indicators of demand should start to show renewed momentum in mid – 2019, leading to above-potential growth of 2.1 percent in 2020.” Despite labor shortages, technological change, trade tensions, and rising interest rates, global economic growth and increasing exports, employment and investments will ensure that Canadian economic expansion remains stable in 2019 and beyond.

2019 will undoubtedly bring other challenges, but, despite the plan for continuing deficits federally, Canada’s fiscal situation is in better shape than most Group of 20 economies. For now, risks of a recession both in Canada and globally are relatively low. If business investment strengthens and households add to savings in 2019, Canadians will be better able to weather any global economic crisis.

 

Sources (Conference Board of Canada, Bank of Canada, Canada Business Development Association. Canadian government. Stats Canada.)