Economic ‘rotation’ remains a work in progress

Let’s relegate the first half of 2016 to the economic waste bin, and move on. Canada can do better than the estimated two-per-cent quarterly contraction our economy clocked as of the end of June.

Economists are forecasting a post-wildfires rebound in gross domestic product of as much as 3.5 per cent in the third quarter. Marginally weaker, but still healthy, growth is the likely outlook for October to December as Alberta’s oil production gets back on track.

To do that, a lot has to go right — in Canada and elsewhere.

Domestically, we need to see business investment finally perk up and consumer spending continue to flow without stoking the already smoking housing market.

What we don’t need is any more beyond-our-borders surprises, like Brexit, or the kind of uncertain future a Trump presidency would deliver to Canadian exporters — both developments have come with dire predictions of a spillover recession.

Some insurance could be provided by the long-awaited “rotation” in Canada’s economy, one that would see business investment — and subsequent export growth — replacing consumer spending as our economic engine.

“Much has been made of the ongoing rotation of Canadian economic growth that has been precipitated by a dramatic fall in commodity prices from 2014 highs,” economist Brian DePratto, at TD Economics, said in a new report. “Unfortunately, this growth rotation has shown signs of stalling over the past several months. After strong gains in December and January, export volumes have fallen for the past five months straight. Meanwhile, low interest rates have continued to be a boon to the real estate market, which has single-handedly been responsible for roughly half the growth in real GDP since the end of 2014.”

While business investment and export growth remain works in progress, the hope now is for a battered — but tentatively recovering — energy sector to pick up some of the slack. And not too soon at that.

This week saw a 0.1-per-cent decline in retail sales for June, while manufacturing showed a surprising 0.8-per-cent rebound, a performance that recovered some of May’s losses but could prove transitory, given the long-term weakness in that sector.

“Retail was pretty disappointing for June, there’s no doubting that” but, overall, the sales data “are all still running at a solid clip,” Robert Kavcic, senior economist at BMO Capital Markets, said in an interview. “... the fact is we’re probably going to get at least some recovery from the GDP decline we saw in May because oil production began to come back on line.”

Perhaps some additional help will arrive from the federal government, which in July began a new enhanced Canada Child Benefit program that should provide an economic buffer by boosting household spending ahead of Ottawa’s promised multibillion-dollar infrastructure plan, which might not hit the ground until early 2017.

There is a fallback, of course: Another interest-rate cut by Bank of Canada governor Stephen Poloz and his policy team, who last year twice lowered the key lending level — bringing it to 0.5 per cent — acting as a first responder to the plunge in oil prices.

“I think it would probably take a lot on the downside for them to actually cut rates,” Kavcic said. “On the flip side, I think it would probably also take a lot on the upside to get them to move any earlier than, say, the middle of 2017. Just take a look at what core inflation is doing. We’re sitting at 2.1 per cent again in July and if you go back a year and a half or two, we’re been bouncing around two per cent. So, there’s not a lot of urgency there for them to move either way.”