Canada’s uncertain outlook
Canada’s economic outlook is uncertain amid chaos of trade wars heading into 2019,
The best economic news heading into 2019 might be that we’re poorer than we thought a few weeks ago.
Statistics Canada changed history last month, revising economic growth in 2015 to a mere 0.7 per cent, compared with its original calculation of one per cent. The 2016 expansion was also cut by three-tenths of a percentage point, to 1.1 per cent. Merry Christmas.
Now the central bank must do some recalculating of its own.
Policy-makers have a rough idea of how many goods and services the economy can produce without causing inflation. Before StatCan’s revisions, they thought we had reached that point. A smaller gross domestic product suggests the pressure to raise interest rates vanished, along with the billions of dollars in economic output that only ever happened on paper.
It’s weird to cheer the disappearance of so much wealth, but governor Stephen Poloz and his deputies will benefit from some breathing room.
At this point in 2017, virtually every major economy was growing. Christine Lagarde, the managing director of the International Monetary Fund, was nudging members to fix their roofs while the sun was still shining.
The clouds rolled in faster than most expected. U.S. President Donald Trump’s trade wars are slowing global commerce and upsetting financial markets.
The tumult could be temporary, or it could be the beginning of something terrible; it’s hard to tell. The jobless rate in the United States is 3.7 per cent, which must count for something. Yet the S&P 500 index was on track for its worst year since the financial crisis a decade ago.
Earlier this autumn, DHL Express announced it was adding a new flight to Vancouver from its North American distribution hub in Cincinnati to keep up with a double-digit increase in demand. “Absolutely, there is strength in the global economy,” Andrew Williams, chief executive of the company’s unit, said.
But not enough strength to keep one of DHL’s rivals out of trouble. FedEx Corp. cut its earnings outlook this week, after raising it just three months ago, according to Bloomberg News. The company’s stock price plunged the most in a decade.
“When you have a change that comes on you as fast as this did, it’s hard to react to it,” Fred Smith, the chief executive, said on a conference call.
“Most of the issues that we’re dealing with today are induced by bad political choices,” Smith said, citing Trump’s import tariffs and the retaliatory measures they provoked.
BlackRock Inc., the New York-based asset manager with a portfolio of more than $6 trillion, says the U.S. could tip into recession as soon as 2020. That’s disconcerting because America is currently the only major economy that still is performing well.
Canada may avoid a downturn, although at the price of being condemned to muddling along, much like Japan and some of the bigger European economies. Weak oil prices and excessive private and public debt could stall the engines that powered the economy clear of the Great Recession. If the trade wars persist, exports also will suffer, threatening stagnation.
“Growth will be shallow and corrections will be shallow,” Aubrey Badeo, BlackRock’s Toronto-based head of Canadian fixed income, said. “A Japan situation could be something we gravitate toward here.” We’re not there yet.
Most forecasts predict the economy will grow by around 1.5 per cent next year, roughly equivalent to the Bank of Canada’s non-inflationary speed limit.
“Plans to increase investment and employment, often supported by sales expectations, are widespread, especially in the services sector,” the central bank says in its latest quarterly Business Outlook Survey (BOS), released Friday.
Companies added about 220,000 jobs over the 12 months through November, around the annual average since 2010, and the unemployment rate has been no higher than six per cent since October 2017, by far the most impressive stretch in data that dates to 1976. Hiring is a lagging indicator, but one that says a lot about an economy’s underlying strength. By that measure, Canada is fine: There is a reason the Bank of Canada felt the need to raise its benchmark interest rate five times from July 2017 to October 2018.
“The Canadian economy begins this new year in a pretty good place,” Poloz said in an interview with CTV News this week.
Still, the central bank paused earlier this month, and most economists and market watchers predict it will opt to leave its interest-rate target unchanged at 1.75 per cent again in January, and probably even at its policy meeting in March.
That’s a shift; the consensus until a couple of weeks ago was that policy-makers would move borrowing costs higher first thing in the new year. Some analysts now predict an increase in the spring; Basdeo said “we’d be lucky” to get one hike in 2019, and definitely not before the second half.
Central banks raise interest rates when the economy is strong. Canada’s prospects are mediocre, at least until the trade wars subside and oil prices rise. Wage growth remains lacklustre, and personal consumption grew only 1.9 per cent in the third quarter, the weakest since 2013. The household savings rate was 0.8 per cent, near a historic low. Monthly retail sales have been roughly flat since posting an outsized 2.1-per-cent gain in May.
Hope for Canada’s economy in 2019 rests with entrepreneurs and business leaders. “We expect to see quite a good improvement in investment,” Poloz said. He’s been saying that for years, but the story came true in 2018, despite the uncertainty created by the renegotiation of the North American Free Trade Agreement.
There’s reason to think that will continue. NAFTA is sorted, mostly. The BOS, which ranks among the central bank’s favourite indicators, shows that investment intentions over the next 12 months are depressed on the Prairies, but “solid” everywhere else.
The Trudeau government’s promise to cut taxes on new capital, including intangibles such as intellectual property, and to prune regulations should be good for animal spirits, according to Michael McCain, chief executive of Maple Leaf Foods Inc.
Basdeo of BlackRock acknowledged that the shift to a digital economy, which is driving rapid investment in talent, software, and advanced technology such as artificial intelligence (AI), could offset the many negatives. Bold companies will see the chaos as a chance to make money, or get a jump on their rivals.
“No doubt, there is a level of concern,” Tasso Lagios, managing partner at Richter LLP, the Montreal-based provider of financial services for wealthy entrepreneurs, said in an interview. “But I find my clients are moving quicker and quicker to take advantage of opportunities. A lot of opportunities are being taken, but always with a worry.”
Things could go terribly wrong in 2019. That’s why so many equity investors are cashing out. But executives are moving forward, emboldened by high profits, full order books, and the need to retool their businesses for an economy based on data and AI. That could be enough to avoid stagnation, or worse. Expect low interest rates for a little longer as hedge, but also to give the boldest executives another reason to seize the moment.