Improved economic outlook for Canada, but weaknesses remain

OTTAWA, May 8, 2017 /CNW/ - The Canadian economy is expected to grow by 2.3 per cent this year—a substantial improvement over the previous two years. However, growth is expected to drop below 2 per cent again in 2018, according to The Conference Board of Canada's Canadian Outlook: Spring 2017.

"The Canadian economy has picked up steam and posted impressive job gains since the second half of 2016," said Matthew Stewart, Associate Director, National Forecast, The Conference Board of Canada. "While this paints a positive picture for the year ahead, it masks continued weakness in the areas of business investment and international trade that will limit growth beyond 2017." 

Highlights

• The Canadian economy is expected to grow by 2.3 per cent this year, before dropping below 2 per cent again in 2018.
• Household and public sector spending will be the main drivers of economic growth this year.
• Lack of business investment outside of the energy sector remains a concern for the Canadian economy. Non-energy business investment is expected to decline for the fourth consecutive year in 2017.
• Exports will see a small improvement this year, but greater protectionist measures in the U.S. are a key risk to the forecast, as they could lead to much weaker growth in exports than projected.

Household spending will continue to be the main driver of Canadian economic growth and is forecast to expand at a solid 2 per cent this year, thanks to the substantial employment gains in the last few months and the stimulus from the federal government's Canada Child Benefit Program. However, consumer spending is projected to slow starting in 2018. Real wage growth remains non-existent and average hours worked have declined. Interest rates are also expected to begin rising again, starting in 2018, making it difficult for consumers to keep up the current pace of spending. Additionally, employment gains are forecast to slow substantially beginning in 2018. The economy is expected to add 223,000 new jobs this year and this is forecast to drop to just 166,000 jobs in 2018.

The public sector will also make a large contribution to economic growth in 2017. With the federal and many provincial governments committed to boosting infrastructure spending, public sector investment is set to post its largest gain since the stimulus program contained in Canada's Economic Action Plan in 2009–10. However, beginning next year, public sector growth will slow as governments increasingly focus on controlling cost increases to improve their fiscal positions.

The biggest weakness in the economy remains the lack of business investment. Energy investment, which was responsible for almost 80 per cent of the decline in business investment over the past two years, is expected to begin picking up this year as commodity prices recover. However, non-energy investment is forecast to decline for the fourth consecutive year. Despite an anticipated 20 per cent surge in pre-tax corporate profits this year, investment in machinery and equipment is expected to decline by 1.9 per cent. The outlook for investment in non-residential building construction is less pessimistic, although a decline in construction is still anticipated this year.

The international trade sector also continues to underperform, especially considering the steep drop in the Canadian dollar over the last two years. Export growth will manage only a small improvement this year, expanding by 2.1 per cent. However, most of that growth will be in energy exports. Non-energy exports are forecast to eke out growth of just 1.2 per cent—not much better than last year. Motor vehicles and parts exports will take a major hit this year as production at GM's consolidated line in Oshawa comes to an end, and the agriculture and wood products sectors face trade restrictions. The probability that greater protectionist measures will be put in place in the U.S. by the Trump administration in the coming years presents a significant downside risk to the export outlook.  

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SOURCE Conference Board of Canada

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