Cautious Upsurge for the Canadian Economy

economyOver the past dozen years, our trade geography has worked against Canada because our major trading partners have been growing more slowly than the global economy. From 2001, the rise of China and other emerging-market countries outpaced growth in U.S. demand. As such, emerging markets now account for 80 per cent of global growth. Meanwhile, Canada’s Gross Domestic Product (GDP) is forecasted to grow by only around 2 per cent for the year. One caveat, the problem with GDP data is that it’s like looking in the rear-view mirror. It’s an imperative picture of where the economy has been, but hardly lends to providing clarity into what the future holds.

To make matters worse the shutdown in Washington has an offshoot of Canadian ramifications. Experts suggest the U.S. economy will slacken after the shutdown. If days stretch into weeks and weeks into months the preceding strongest period of economic growth within the world’s biggest economy since the Great Recession risks reverting downwards. Being Canada’s largest trading partner — by a wide margin at that — a slowdown in the U.S. economy will directly affect many sectors and companies.

So what can be made of this? More than ever, there is a resounding push for Canada and Prime Minister, Steven Harper to “diversify our economy”. For decades, Canada’s has relied on geography, rather the close proximity of the United States. If Washington’s shutdown was perhaps a latent wakeup call, but fracking can be touted as a sort of punch to the face. Fracking technology, despite its negative environmental effects has allowed the U.S. to produce more of its own shale oil and natural gas so there is less demand for Canadian products.

According to the World Economic Forum, Canada ranks 14th overall in the 2013-14 Global Competitiveness Report, a position the country is holding for the second consecutive year. The report listed the top two most problematic factors for doing business in Canada as innovation-related: access to financing, and insufficient capacity to innovate. Canada has highly efficient goods, labour and financial markets, but trade barriers are limiting the effectiveness of these advantages.

For Canada to achieve “diversification”, the Canadian economic infrastructure needs a tune up. Up until now, there has been much opposition to building pipelines from oilsands in Alberta and British Columbia. Also to date, there has also been opposition to foreign, state-owned firms’ involvement in the Canadian economy. To enable some level of diversification, the Prime Minister is loosening the idea of this concept, but tightening the rules on state-owned companies acquiring majority shares in Canadian assets.

The World Economic Forum also noted that Canada’s competitive strengths include its primary and higher education systems, efficient labour market, and stable and efficient public institutions. However, they concluded that Canada would benefit more if they capitalized on these specific strengths more.

More good news: The first quarter of Canada’s economy looked bleak and lacklustre. Don’t despair though, economists are predicting that the limitations that handcuffed exports (namely the troubled Eurozone) and jobs growth have broken. The improving economic conditions currently in the European Union point to a renewed, yet cautious upsurge in the value of Canadian exports. In the second quarter of this year, Canada’s economy has grown at an annualized rate of 1.7 per cent, and government forecasts are calling for about a 2.5 per cent growth in 2014. The housing market was also stronger than expected. The Canadian Real Estate Association raised its 2013 outlook for homes sales and reported an 11.1 per cent jump in August sales compared with a year ago.

Despite the positives, Governments are cautious and continue to pull back on the spending reins. Consumer debt remains high, suggesting household spending on cars, appliances, clothes, and homes will be kept in check, especially into the Christmas season. Optimists see the savings rate rising and debt levels climbing more slowly. They note that Canadian household debt is nowhere near the levels experienced in the U.S. and U.K. prior to their credit crises. Rates will rise; that’s a given. Nevertheless, they will rise slowly and Canadians — sensible as we are — will adjust accordingly.