Ongoing trade tensions and uncertainty in the global economy are impacting Canadian business investment and household purchasing power, but a recession is not on the horizon in Canada, according to a report released on Monday by the Conference Board of Canada.
The board’s The Canadian Outlook is forecasting real gross domestic product to expand by 1.6 per cent this year before posting a gain of 1.8 per cent in 2020.
“The Canadian economy is set for a period of slower growth due to the weakness in the global economy,” said Matthew Stewart, director of national forecast, forecasting and analysis, in a news release “This will lead the Bank of Canada to cut interest rates early next year.”
Key highlights from the report include:
- global economic growth is slowing as trade tensions impact businesses’ investment decisions and households’ purchasing power;
- after gaining nearly four per cent in the second quarter, growth in the Canadian economy is expected to moderate over the remainder of the year;
- Canadian labour markets have performed very well over the first half of the year, but job growth will slow over the second half of the year alongside a weaker economy;
- tight labour markets will help sustain wage growth and consumer spending over the near term, despite the debt-service ratio reaching an all-time high in the second quarter;
- the housing market is recovering as strong employment and population growth, coupled with lower mortgage rates, is supporting demand;
- it has been another weak year for business investment in Canada; however, 2020 looks more promising with energy investment poised for a small rebound and as pipeline projects move forward;
- the export sector will feel the impact of slowing global demand.
“After two quarters of subpar growth, the Canadian economy posted a remarkable gain of nearly four per cent in the second quarter of 2019. While the headline number was noteworthy, the specific details in the report from Statistics Canada indicate that the performance was far less encouraging,” said the board’s report.
“Final domestic demand contracted by 0.7 per cent last quarter, the third decline in the last four quarters; therefore, the GDP gain last quarter was driven entirely by trade. Merchandise exports were up an impressive 15.5 per cent in the quarter but, unfortunately, this growth does not mark the long-awaited resurgence in our trade sector. Most of the increase was spurred by energy and agricultural exports after those sectors posted large declines at the beginning of the year.”
Looking forward, one of the key factors affecting Canada’s prospects for economic growth is the global trade tensions that are negatively affecting world economic growth, added the board.
“Our forecast suggests that these disputes will not result in a recession, either globally or here at home. But the Canadian economy is set for a period of slower growth due to the weakness in the global economy, and this will lead the Bank of Canada to cut interest rates early next year.
“However, news on the economic front is not all bad. Strong population and income growth will continue to drive demand for housing and for household goods and services. As well, improving prospects in the resources sector will increase business spending over the next few years. The Bank is therefore expected to cut rates just once to support economic growth but will not have to undertake aggressive easing,” said the report.
“The U.S.–China trade war has done more damage to the global economy than previously projected. In fact, growth in the global economy is expected to slip below the 3.0 per cent mark over the near term with gains of only 2.6 and 2.5 per cent in 2019 and 2020, respectively. The escalation in tariffs has led to ramped-up uncertainty in the global economy and has forced many firms to undertake costly adjustments to their supply chains and to postpone capital expenditure plans.
“Unfortunately, Canada has limited options for diversifying trade away from the United States and China—its two most important trading partners, both of which are experiencing weaker growth. The United Kingdom is Canada’s third-largest trading partner, but its economic prospects are even worse as the Brexit-linked turmoil shows few signs of ending and threatens to pull all of Europe into a recession.”
Mario Toneguzzi is a Troy Media business reporter based in Calgary.