The Canadian Economy 2020: The way ahead.

Global growth slowed to 3% for 2019, according to International Monetary Fund (IMF) analysis; the global slowdown attributed largely to the ongoing trade war between China and the USA, by which Canada is also affected.

By Max Singh

With another decade behind us what do the economic Gods have in store for Canadians in 2020?  In retrospect, 2019, was not a stellar year for the Canadian economy with inflation-adjusted gross domestic product (GDP) expanding by around 1.5 per cent. This was less than growth in both 2018 (two per cent) and 2017 (three per cent). 2019 was also a year of a general downturn in global economies—nearly 90% of countries experienced lower growth in 2019 than in 2018. So there was little growth amongst uncertainty not only in Canada, but worldwide.

Global growth slowed to 3% for 2019, according to International Monetary Fund (IMF) analysis; the global slowdown attributed largely to the ongoing trade war between China and the USA, of which Canada is also affected. The trade war will have slashed nearly $700 billion from the world economy by 2020. This slowdown for Canada’s economy is also affected by the downturn in export products such as Canadian lumber, aluminum, canola and other agricultural products. Even the slightest tariff or change in import export laws have a profound effect on the Canadian economy as 75% of Canada’s exports go to the United Sates.

In a weak business environment, it is Canadian household debt that is driving the economy despite a downturn in the real estate sector in the first three quarters of 2019.

The oil sector continues to present major challenges for Canada’s oil producing provinces. While at this time last year, the Alberta and Saskatchewan economies were expected to take off again as a result of new transmission capacities from the Enbridge Line 3 replacement, delivery delays led the Alberta government to extend oil production restrictions to 2020.The global economic situation suggests that demand for oil will shrink, putting downward pressure on prices. Crude oil prices are expected to remain relatively low again this year…not good news for Alberta which has seen mass job layoffs in the oil and gas sector. In British Columbia, where the main economic driver has been real estate, growth was weak as the housing market nursed its continuing hangover from the frantic activity of 2016 and 2017.

In a weak business environment it is Canadian household debt that is driving the economy despite a downturn in the real estate sector in the first three quarters of 2019. Restrictive provincial policies on real estate in British Columbia and Ontario, the introduction of the stress test, new mortgage rules and downward trending house prices all contributed to this downturn. However, house buyers have finally adapted to changes and the slight rebound in household investment is due in part to labour market strength. Despite modest growth in Canada, the economy created nearly 360,000 jobs in the first 10 months of 2019. Unemployment rates have reached historic lows in multiple provinces. Although many businesses are struggling with a lack of employees, labour shortages are driving up wages.

After over a year of stable interest rates, mortgage rates began to fall mid – year. The Bank of Canada is now expected to hold the key interest rate at 1.75% through 2020, as it anticipates a recovery in the country’s economy. In addition, although several central banks have begun easing their monetary policy, the debt load of Canadian households remains alarmingly high, while the savings rate is down in a number of provinces. The Bank of Canada will likely be more reluctant to cut rates considering that a decline could worsen the financial situation of households.

The outlook is brighter in newer parts of the Canadian economy, such as: technology, tourism, scientific and technical services, business services, and the rapidly expanding digital sector.

Talk of recession is always on every ones lips. However the Bank of Canada,    financial institutions and experts say recession is a long shot given the strong regulations and inherent stability of Canada’s financial market- a strength that allowed Canada to weather the 2008 global financial crisis relatively unscathed. In its December 2019 update, the Bank of Canada signalled a cautious stance and is monitoring a Canadian economy that still faces risks due to evolving international trade conflicts, weak global growth and the heavily-indebted domestic households.

However, economic activity in Canada is being underpinned by pockets of strength, notably a rebound in housing markets and still healthy immigration levels.  2020 should be marked by a modest recovery in the real estate market, residential investment and household consumption. Of course, the situation differs from province to province. British Columbia and Quebec are expected to lead the recovery while the biggest improvement is expected in the Prairies after a rather difficult 2019. The Maritime Provinces should continue to post positive growth as a result of population increases, due to inward immigration, particularly in Nova Scotia and Prince Edward Island.

The outlook is brighter in some other industries, including technology, tourism, scientific and technical services, business services, and the rapidly expanding digital sector. In aggregate terms, real business investment probably won’t make much headway in Canada in the next two years.  Canada’s real GDP is forecast to expand by 1.8 per cent in 2020 and 1.9 per cent in 2021. This, along with better prospects in the energy sector materialize, should keep Canada’s economy out of recession.

Other Bright spots are that while provincial governments are expected to maintain a high degree of spending restraint as they work to balance their books. The Bank of Canada expects that if global economic conditions stabilize, the Bank will make no changes to interest rates in 2020.

Also encouraging is the signing of the free trade agreement with the U.S. and Mexico, which although contentious on some issues, seems to have led to a working agreement. These conditions should translate into a growth rate of about 1.7% for the Canadian economy in 2020. Again in 2020, growth will be limited by global uncertainty associated with trade tensions, the U.S. elections and the future of Brexit, In addition, more than a year since the Bank of Canada’s last interest rate hike, most of the impact of the 2017 and 2018 increases has already made its way into the economy, and households have been able to adapt.

{Spruces: Business Council of British Columbia, Conference board of Canada. Business Development bank of Canada, Bank of Canada. Canadian Economic Outlook. IMF. )