As the clock ticks down on 2015, it is time to ponder what may lie ahead for the Canadian economy. The near-term picture isn’t particularly heartening. After a disappointing 2015 that included a minor “technical” recession in the first half of the year, Canada looks poised for a somewhat better, but still generally lackluster, performance.
The Canadian economy continues to be weighed down by sluggish world growth and dismal commodity markets. The global outlook remains subdued. Nor are there many signs suggesting an imminent rebound in commodity prices. The Bank of Canada’s commodity price index has been sliced in half since mid-2014 and is now back to where it stood in 2003. Moreover, the commodity downturn is not just about oil; it also extends to natural gas, coal, base and precious metals, uranium, potash, and other industrial raw materials. Taken together, the resource-based sectors listed in the previous sentence supply about two-fifths of our merchandise exports.
That said, within the Canadian commodity basket, oil undoubtedly looms largest. Two years ago, before prices began to collapse, oil and natural gas combined accounted for one-quarter of the nation’s exports, and the energy and pipeline industries were responsible for more than a third of all business capital spending. So the dramatic decline in oil and natural gas prices has delivered a punishing blow to our economy, dampening both private sector incomes and government revenues and triggering a broad slump in business investment.
Turning to the domestic economy, record levels of household debt and stretched urban housing markets will keep a lid on gains in consumer outlays and residential investment in the next two years. Housing-related spending has been running ahead of demographic and economic fundamentals and is overdue to downshift. As a result, housing is expected to contribute little to economic growth over 2016-17.
Business investment is on track for a second annual slide in 2016, led by further cuts in capital budgets by oil, gas, and mining companies. Stepped-up infrastructure investment and a dose of fiscal stimulus from the newly-elected federal government should offset some of the weakness in private sector demand. However, it must be noted that a number of provincial governments are not in a financial position to join Ottawa in a multi-year program to boost infrastructure spending.
For Canada, the main positive features of the current economic setting are the ongoing expansion in the United States and the short-term advantages conferred by a plunging Canadian dollar that has lost 30 percent of its value against the U.S. currency in the last three years. Near record-low borrowing costs are also providing support to domestic demand – and will continue to do so as the Bank of Canada keeps its short-term interest rate at rock bottom levels over 2016.
Looking ahead, an important unknown is the extent of the anticipated recovery in Canada’s non-energy-exports. So far, the growth of non-energy exports has been underwhelming, in part reflecting the post-2007 hollowing out of the Canadian manufacturing base and the disappearance of thousands of firms in the sector. These latter developments put a question mark over the growth potential for Canadian manufacturing, even with a more competitive exchange rate.
In the past decade, the geographic centre of gravity in North America for manufacturing production and related investment has moved inexorably southward, mainly benefitting the southern U.S. states and Mexico. It is doubtful that a period of Canadian dollar weakness will be sufficient to reverse this pattern, although it may stem further losses of Canadian production capacity and prompt some manufacturers to channel more capital spending to their Canadian operations.
In the meantime, several Canadian industries that produce tradeable services – everything from engineering, finance and scientific and technical services to education, IT-based services, and tourism – arguably will have better growth prospects than manufacturers or resource producers over the next few years. Canadian policy-makers would be wise to pay attention to the upside opportunities which exist in tradeable services.
Add it all up, and Canada should be able to crank out real economic growth in the vicinity of 1.6 percent next year, a slight improvement on 2015’s roughly one percent gain, but certainly nothing to get excited about. As the sun sets on 2015, Canadians have few reasons to feel ebullient about the country’s economic prospects in the coming year.
Jock Finlayson is Executive Vice President of the Business Council of British Columbia.