Canadian Economy: What to Expect in 2017?

Canadian economy

The Canadian economy is already one month into the New Year. We all agree that 2016 was a hectic year, punctuated by milestones such as the “Brexit” referendum, the unexpected, to say the least, election of Republican president Donald Trump and tragic terrorist attacks, notably in Berlin and Nice. Some of these events will have, in their own way, influenced Canada’s economic performance and the RBC estimates that economic growth reached 1.3% in 2016. Although small, this growth of the gross domestic product (GDP) is driven mainly by household consumption.[1] Among others, the favourable climate contributed to increased consumer spending and home sales. Now, what can we expect in 2017?

Despite political uncertainty and international conflicts, the world’s economy should grow by 3.4% in 2017, or 0.3% more than in 2016. Nationally, the last “RBC Economic Outlook” published on December 16, 2016, forecasts real GDP growth of 1.8% in 2017[2]. Changes to the Canada Child Tax Benefits on July 1st mean disposable income should increase in the coming year, which will fuel expenditure growth. Moreover, the Trudeau government’s expansionary fiscal measures will boost the economic recovery. The recovery in energy prices should also foster business investment in this sector. In Alberta for instance, the minimum wage increase announced (from $12.20 to $15.00 in 2018) will be beneficial for the income of many households (300,000 workers). Other provinces has increased minimum wages or are expected to do so in a near future. Even though the Canadian Federation of Independent Business warns that raising wages could jeopardize as many as 50,000 jobs, especially in sectors where minimum wage is the norm, such as retail and hospitality, it is expected that overall negative effects will be offset by the advantages[3].

The loonie, which has stabilized for the time being, should depreciate slightly in 2017. The expected oil price recovery should put upward pressure on the dollar while the rising interest rates in the United States will have the opposite effect. After falling below 72 cents US early in 2016, the Canadian dollar appears to have stabilized at nearly 76 cents US and could lose some strength in the coming weeks or months[4].

Oil-producing provinces, including Alberta, could see their economy rebound and show a moderate growth similar to the rest of the country. However, Newfoundland may experience a certain economic contraction. In light of the government’s decision to pursue an austere and restrictive fiscal policy, by increasing personal income tax for the purpose of reducing deficits, growth may not be in the picture for 2017.

GDP growth could reach 2.3% south of the border. Stimulus measures proposed by the new Trump administration should boost this progression. Wage increases in several states and employment gains will foster increased consumer spending.

However, American protectionist economic policies could undermine medium-term economic growth. Imposing high tariffs on imports into the United States would increase prices, which would be detrimental to consumers. A survey[5] among top American economists reveals an almost unanimous agreement that free-trade is good for society. In fact, 95% of respondents claim that protectionism reduces economic welfare. Although some economic actors may be disadvantaged, overall, the social surplus is increased. As outlined by Mathieu Bédard, economist at the Montréal Economic Institute, “trade liberalization leads to lasting benefits, despite some short-term inconveniences. This is one of the indisputable conclusions of the economic analysis, and is shared by most economists. Free-trade increases welfare in these countries through lower prices and efficiency gains.” By solely stipulating that jobs in the United States’ manufacturing sector were lost, president Trump is forgetting that resources were allocated to more efficient businesses and sectors, producing goods and services with greater added value. By isolating ourselves economically, we restrict our market. “If Donald Trump wants to negotiate a better deal for the United States, it will inevitably have to be a treaty that further opens up trade.”, said Mathieu Bédard, economist at the Montreal Economic Institute[6] By signing a decree to withdraw from the Trans-Pacific Partnership (TPP signed February 4, 2016, in Auckland, New Zealand), and promoting his desire to renegotiate the North American Free Trade Agreement (NAFTA), it would seem that the new American government intends to implement its strict protectionist measures, even though American economists disagree.

For finance companies like Hitachi Capital Canada, these forecasts can guide executives in terms of strategies to be prioritized and put into action. The Bank of Canada’s overnight rate target should remain unchanged in 2017 and will be increased for the first time in 2018, according to the RBC. With historically low rates, finance companies generally rely on the volume of loans to counteract the adverse effects of reduced lending revenue. Observing the increase in business investments, financial institutions will see an opportunity to increase the number of loans granted. These businesses will have to adapt to the market to remain competitive and avoid loss of profits.

In the coming months, the NAFTA issue will have to be monitored closely (the Trudeau government’s brain trust is very busy on that front) as will the issue of softwood lumber. The United States are an important market for Canadian lumber, which represents almost 35% of American consumption (a market of nearly 6 billion dollars for Canadian industries). In Québec, 60,000 jobs are directly involved. If restrictions on exports to the United States are imposed (customs duties could reach 25%, possibly by the end of March 2017), there will be significant repercussions on the industry and investments in equipment.

[1] http://www.rbc.com/newsroom/news/2016/20161216-econfcst-ntl.html

[2] http://www.rbc.com/newsroom/news/2016/20161216-econfcst-ntl.html

[3] http://www.ctvnews.ca/canada/alberta-s-minimum-wage-jumps-to-12-20-per-hour-1.3097601

[4] http://www.rbc.com/nouvelles/news/2016/20161216-econfcst-ntl.html

[5] http://www.igmchicago.org/surveys/free-trade

[6] http://www.iedm.org/fr/62237-le-libre-echange-trump-nous-trompe (Free Trade: Trumps is misleading us)