Finally! Canada poised for recovery
4th month of growth in a row logged
OTTAWA — Wait until next year. The premise is getting old for Canadians awaiting the return of an economy that can be counted on for jobs, solid incomes and financial security.
As far back as 2010, the Bank of Canada held out the prospect of better times in the year ahead. But unexpected events — whether it was a tsunami in Japan, a debt crisis in Europe, or political shenanigans in Washington — always took the shine off the optimism.
“If you were looking for a theme song for the Canadian economy, it would either be With a Little Help from my Friends, or, alternatively, Led Zeppelin’s The Song Remains the Same,” says Craig Alexander, TD Bank’s chief economist. He says we’re still waiting for a change from consumer-driven growth.
“We are going to eventually get this rotation toward exports and business investment and away from real estate and consumer spending. We said that would happen in 2013. It didn’t happen. Now we’re saying it is going to start next year,” Alexander said.
Recent data back this up. On Monday, Statistics Canada reported better-than-expected growth in the economy, marking the fourth-consecutive monthly increase with the long-beleaguered manufacturing sector again taking much of the credit.
Gross domestic product was up 0.3 per cent, slightly above the 0.2 per cent gain forecast by analysts, following a 0.3 per cent pace in September, Statistics Canada said.
The recent stronger performance is a sign Canada is beginning to benefit from the accelerated pull of its biggest trading partner.
Statistics Canada said manufacturing grew 1.3 per cent in October after a 1.2 per cent rise in September, led by chemical, food and beverage and tobacco products.
Still, TD’s Alexander is not predicting eye-popping growth in 2014. TD, like the Bank of Canada and a consensus of economists, is estimating growth will rebound to about 2.3 per cent in 2014. That would follow two years of sub-par growth at 1.7 per cent in 2012 and an estimated 1.7 per cent this year.
The improvement foreseen for 2014 is not big and won’t lead to massive job creation and steep income growth. But the difference between 1.7 per cent and 2.3 per cent is important.
The Bank of Canada believes the economy has the “potential” to grow about two per cent. At 1.7 per cent, it has underachieved whereas, at 2.3 per cent, the economy can eliminate slack and head toward full recovery.
The central bank thinks 2015 will see the gap close further with 2.6 per cent growth, enabling the economy to return to health by the middle or the end of 2015.
According to the central bank and others, 2014 will be the year the economy finally enters the zone of what Bank of Canada governor Stephen Poloz calls selfgenerating, self-sustaining “natural growth.”
That is critical because Canada, for the past three years, has experienced a kind of un-natural recovery.
Yes, it has recouped all it lost in the recession in terms of output and jobs, but persistently low inflation and continuing slack in production capacity suggest something has not been quite right.
Growth was achieved primarily at first because federal and provincial governments pumped tens of billions of dollars into the economy — all of it borrowed. The Bank of Canada and its U.S. counterpart have also kept interest rates at or near rock bottom, encouraging businesses and households to borrow and spend.
Snatch away the stimulus measures and Canada, some say, would most likely still be in recession.
CIBC chief economist Avery Shenfeld said there was nothing fundamentally amiss about Canada’s domestic economy before 2008 when the world’s financial system was dealt a severe blow by a meltdown in U.S. real estate, which spread to banking and other industries.
While Canada’s economy initially emerged from the 2008-09 global recession in relatively good shape, it has limped along more recently amid weakened demand for many of the country’s major exports.
“Part of the reason Canada hasn’t seen the lift in capital-business spending is because the rest of the world has disappointed us,” Shenfeld said.
“Interest rates have been low, financing has been available, but unless you are sure the product demand is going to be there, it’s hard to trigger a boom in capital spending. So a brighter global economy could see a return in capital spending in the resource sector, which is part of that rotation that’s been missing.”
That’s where a little help from our friends, particularly the United States where 75 per cent of exports end up, will go along way to curing Canada’s ills, say analysts.
Optimism for 2014 is tied to how quickly the U.S. recovers and how much that boosts Canadian exports. The Royal Bank is among the most optimistic, pencilling in a 2.6 per cent expansion next year, and 2.7 the year after that, which will more quickly close the output gap and get the Bank of Canada to raise interest rates in 2015.
Exporters will also benefit from a swooning loonie, analysts say, because, by comparison, the U.S. economy will outperform Canada’s.