Although the U.S. economy is showing signs of renewed vigour, the Canadian economy is weakening, according to Investment Executive‘s survey of eight economists in the financial services sector.
Canada is experiencing a cyclical economic slowdown as the domestic housing market cools and overleveraged consumers focus on paying down their debt. While similar problems still linger in the U.S., economic growth there is starting to pick up.
“Canadian households are burdened with high debt, and their primary preoccupation will be to limit growth in that debt,” says Carlos Leitao, chief economist and strategist with Laurentian Bank of Canada in Montreal.
This will restrain growth in consumer spending and continue to dampen the housing market in 2013. A plunge in house prices is not expected, but a 5%-10% drop over the next few years is likely.
The question is how weak Canada’s gross domestic product (GDP) growth will be this year – and there is a variety of opinions. Paul Ferley, assistant chief economist with Royal Bank of Canada in Toronto, expects Canadian GDP growth of 2.4% in 2013. However, both Lloyd Atkinson, an independent financial and economic consultant in Toronto, and Krishen Rangasamy, senior economist with National Bank of Canada in Montreal, predict it will be only 1.3%-1.4%. The average forecast by the eight economists surveyed for Canada’s GDP growth in 2013 is 1.8%, vs 2.1% for the U.S.
Ferley says that business confidence on both sides of the border will increase early in 2013, when the uncertainty surrounding the U.S. “fiscal cliff” dissipates. Like most other forecasters, Ferley is assuming that a compromise regarding the fiscal cliff will be negotiated that includes tax increases and spending cuts of 1%-1.5% of real GDP rather than the 3% that will occur without a deal. With the resulting increased confidence, there should be more jobs and business investment.
Neither Atkinson nor Rangasamy foresee increased business confidence in Canada in 2013; both economists also think that there will be greater drag on the domestic economy from housing and overextended consumers and that the softness in resources prices will be greater than expected.
Six of the eight financial services forecasters surveyed expect oil prices to average US$90-US$95 a barrel this year. But Rangasamy is assuming only US$85; Atkinson, just US$81.
The external environment is vital to the health of the Canadian economy because Canada depends on exports – resources in particular. Europe is, of course, important, but that region isn’t expected to contribute much to Canada’s GDP growth in the next few years. In any event, China and other emerging markets are more important because their growth will keep resources prices high.
Most economists expect GDP growth in China, a major determinant of global resources prices, to pick up this year to 8%-8.5%. However, Rangasamy expects only 7.5% and Atkinson is assuming only 6%-7% – hence, his oil price forecast for 2014 is just US$79.
If growth in China doesn’t rebound, Canada could be in for an extended period of anemic expansion. Atkinson is forecasting Canada’s GDP growth at just 1.7% for 2014, well below the 2.2%-2.8% predicted by six other economists. (Rangasamy did not provide predictions for 2014.) Atkinson also is predicting that the unemployment rate will stall at 7.4% rather than continuing to drop – and, he warns, it could rise.
Nevertheless, even Atkinson admits that Canada is in much better shape than the U.S., although the U.S. will catch up – and quickly, if our GDP growth remains sluggish.
As of November 2012, Canada had about 400,000 more jobs than before the credit crisis, while the U.S. had regained about only two-thirds of the eight million jobs it had lost. Credit didn’t stop flowing here, but it still isn’t back to normal levels in the U.S. As well, the U.S. housing market is starting to recover, but activity is still far below pre-crisis levels.
The fact that Canada is in better economic condition than the U.S. is reflected in interest rate expectations and the value of the Canadian dollar (C$). Most economists expect the Bank of Canada to start raising interest rates in 2014, while the U.S. Federal Reserve Board (the Fed)has announced that it won’t raise rates until 2015. The average forecast for the 91-day T-bill rate in Canada is 1.3% at the end of 2013 and 1.8% at Dec. 31, 2014, vs 0.1% and 0.2%, respectively, in the U.S.
At the same time, the C$ remains roughly at par with the U.S. dollar despite some softening in resources prices, which are a major driver of both the loonie and our weakening economy. The reason is that Canada is seen as a safe haven by investors, says Avery Shenfeld, chief economist with CIBC World Markets Inc. in Toronto.
However, Shenfeld doesn’t expect this status to last. Once the U.S. has a credible plan for reducing both its deficit and debt, and U.S. growth is strong enough to allow the Fed to start raising interest rates, investors will lose interest in holding the C$. (The timing of this matters: if global growth is strong enough to start pushing up resources prices again, the C$ will stay high. If not, it will weaken.
The strong C$ is good for resources-rich regions, and Western Canada is expected to continue to outperform other provinces, except oil-rich Newfoundland. But the high C$ is a challenge for manufacturers in Ontario and Quebec. Rising U.S. automobile sales is helping Ontario, which has a huge budgetary deficit.
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