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Jock FinlaysonAs Justin Trudeau and his euphoric Liberal colleagues get ready to form a new government in Ottawa, they have reason to worry about the macroeconomic picture. But good news south of the border could have a ripple effect in Canada.

In recent weeks, several forecasters, including the Bank of Canada, have (again) downgraded their growth projections for the Canadian economy. This comes amid a deterioration in the international economic outlook, which also continues to disappoint.

It is clear that the world oil price collapse, in tandem with the downturn in many other commodity markets, has hammered Canada’s resource-centric economy. That has triggered a sharp fall in the nation’s terms of trade, and brought on job and capital spending cuts in the energy and mining industries and many of the service sectors that supply them. For most commodity producers, it is hard to see much light at the end of today’s dark tunnel. For Canada as a whole, mustering an annual economic growth rate of even 2 percent (after inflation) may prove to be a formidable challenge, particularly given that apart from low commodity prices our economy will also be held back by record levels of household indebtedness and stretched housing valuations.

How Canada fares in 2016-17 will hinge, in large part, on developments in the United States. While America has also lost a step at a time of choppy world growth, there is an underlying momentum that should keep its economy on a solid, if unspectacular, expansion trajectory.

Armed with a more competitive exchange rate and a host of domestic industries hungrily looking beyond our own somnolent market for new business, Canada stands to benefit as the giant $18-trillion U.S. economy chugs along.

The role of American consumers in driving global demand should not be underestimated. Using market exchange rates, the United States still accounts for 22 percent of all global economic activity, with the vast majority of this made up of consumption spending, plus investment in residential construction.

The good news is that the fundamentals for U.S. consumer and housing-related spending remain strong. Low inflation and falling energy prices are boosting the real incomes of many households. Unlike Canada, the U.S. is a net beneficiary of slumping commodity prices. The labour market looks poised to add a net 1.6 million jobs in 2015, on the heels of 2.1 million last year. Housing markets are normalizing after a multi-year fall-off in housing starts and home prices.

One of the most notable trends in the United States since 2007 has been the subdued pace of household formation. New households emerge when young people leave the family nest, new migrants arrive, and couples or roommates split (resulting in two households where one existed before). The increase in the number of households is an important determinant of the demand for housing, and other goods and services tied to household formation – everything from mortgages, real estate services and home renovation, to cleaning and landscaping services, to cable and Internet subscriptions.

During the 2007-09 recession and the sub-par economic recovery that followed, household formation in the U.S. plummeted, residential investment was unusually weak and homeowners’ equity dropped significantly. This painful adjustment process weighed on economic growth for several years.

With continued improvements in labour and housing markets, the conditions are being set for U.S. household formation to rebound. Researchers estimate an underlying demand to form new U.S. households in the vicinity of 1.3 million per year. This compares to average annual household growth of just over one million per year over the 2008-2014 time frame. In the next half-decade, household growth could very well rise above-trend, due to pent-up demand among people who delayed taking this step during the earlier period of economic weakness. Some studies suggest there are perhaps 3.5 million “missing” U.S. households, some of whom can be expected to enter the housing market between now and 2020. These extra households will be in addition to those stemming from ongoing population growth and demographic change.

Add it all up and there is reason to hope for a sustained lift in both U.S. residential investment, and consumer outlays on goods and services linked to the establishment of new households. From a Canadian perspective, the prospect of a revival in American household formation, homebuilding and consumer spending is perhaps the only bright light on the economic horizon.

Jock Finlayson is Executive Vice President of the Business Council of British Columbia.

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