Canadian economy shifting to a lower gear in 2018

Ottawa – While the Canadian economy was firing on all cylinders in 2017, the pace of growth tapered off toward the end of the year. The slowdown is expected to continue this year, with the economy forecast to expand by a more sustainable 1.9 per cent, down from 3.0 per cent in 2017, according to The Conference Board of Canada’s latest Canadian Outlook.

“Rising interest rates, moderating employment growth, and high household debt will force consumers to reduce their pace of spending this year,” said Matthew Stewart, director, National Forecasting, The Conference Board of Canada. “The hope that trade and business investment would pick up the slack is unlikely to come to fruition as uncertainty surrounding NAFTA negotiations and the possibility of increased tariffs are challenging businesses and exporters alike.”

Highlights

• Following an increase of 3.0 per cent in 2017, Canada’s economy is forecast to grow by 1.9 per cent in 2018.
• While household spending will remain the main driver of economic growth, the pace of spending is expected to ease significantly.
• Employment growth is expected to slow to 232,000 jobs, down from an 336,900 in 2017.

Tighter labour markets and increased retirements from baby boomers will lead to much slower employment growth in 2018. Job gains are expected to slow to 232,000 jobs, down from an impressive 336,900 last year. On a more positive note, a tight labour market will help support wage growth which could help cushion the impact of rising interest rates.

While household spending is expected to continue to be the main driver of economic growth, the pace of spending is forecast to ease significantly as high debt levels, slowing disposable income growth, and rising interest rates force consumers to dial back their spending. Purchases of durable goods are expected to bear the brunt of the slowdown after several years of consumers ramping up purchases, much of it funded on credit. Overall, real personal consumption is expected to increase by 2.4 per cent, down from 3.5 per cent last year.

A variety of factors point to further housing market cooling in 2018. Topping the list is the imposition of a new “stress test” imposed on mortgage borrowers by federal regulators. This reduces the maximum mortgage for which borrowers can qualify for, and it will reduce housing demand, particularly for higher-priced units. Rising interest rates, moderating employment growth, and high household debt will further limit consumers’ housing aspirations. This will be partially offset by stronger population gains resulting from higher immigration targets. Housing starts will ease to roughly 213,200 units this year from 219,700 units in 2017.

Despite strong demand in the U.S. and a competitively low Canadian dollar, exports will continue to underperform in 2018. For the third year in a row, non-energy merchandise exports are on track to record almost no growth, while exports in the wood products, aerospace, and automotive sectors are all forecast to decline for the second year in a row. Exporters are facing numerous challenges and increased uncertainty surrounding the outcome of NAFTA negotiations and the possibility of increased tariffs. Recent Conference Board research found that real GDP would lose half a percentage point of growth in the year following the termination of NAFTA, but the impact could be larger if business confidence or foreign investment to Canada is undermined by the loss of free trade.

Early indications point to another disappointing year for business investment. Despite a more positive outlook among businesses for profits and sales, companies are indicating that they plan to keep overall investment flat. Businesses may be holding back due to trade uncertainty and may also find Canada to be a less competitive destination for investment considering the large American tax cuts passed at the end of last year. Real business investment spending is forecast to expand by just 1.0 per cent in 2018, down from growth of 2.3 per cent in 2017.