Canada’s Economic Outlook: Slowdown Unavoidable

Bank Towers by Don toye 1
Bank Towers by Don Toye

Although Canada can be proud of its healthy banking system and development in the business sector, it is still a country with close ties to the international markets. And if the global economy is in danger, Canadians can’t avoid the consequences.

Slower GDP Growth

“The U.S. debt downgrade, European debt crisis and heightened worries about a double dip recession in the U.S. economy have muddied Canada’s near-term economic outlook. As these developments increasingly weigh on Canadian consumer and business confidence, economic growth will be constrained to a tepid pace over the second half of 2011 and into early 2012,” says a report by TD Economics. The Canadian real GDP is expected to grow by 2.2 per cent in 2011 and 1.9 per cent in 2012, and in 2013 it should finally get a faster pace — 2.6 per cent. The projections are down one percentage point from TD Economics’ forecast in June.

“One key implication of this considerably softer growth profile is that interest rates are likely to plumb the depths for even longer than we had previously anticipated,” explains the report. On the other hand, low interest rates will support activity in the real estate market, putting the country into further danger. Low interest rates could boost consumer spending, creating a property bubble and leading to a high consumer debt and uncontrolled overvaluation in home prices.

Canada About to Lead G7 Recovery

World projections are even more concerning. According to Reuters, the world economy will grow by 3.8 per cent in 2011 and just 3.6 per cent next year, down from the 4.1 per cent and 4.3 per cent forecasts from the last quarterly survey in July. In the comparison with other G7 countries, Canada will experience some of the strongest growth rates — at least over the next two years — due to its healthy banking sector and commodity-driven economy.

“Whether it is the complexities of reaching unanimous agreement among 17 euro area members regarding the resolution of the sovereign debt crisis, or the increasingly polarized U.S. political scene, political risk may be the greatest source of shocks to the global economy today,” said Peter Hooper, chief economist at Deutsche Bank Securities, in a research note.

China Effect

China Flag by Renato Ganoza
China Flag by Renato Ganoza

The Republic of China plays an important role in Canada’s economic future. China’s share of Canadian exports was 1 per cent in 2006; today it is 20 per cent. Chinese firms are rushing to invest in Canadian natural resources. For example, Sinopec paid $4.65 billion last year, buying ConocoPhillips’ 9 per cent stake in Syncrude Canada Ltd., the world’s biggest oil sands producer, and China Investment Corp. spent $1.7 billion in Teck Resources stock in 2009. Conditions are more than comfortable.

“If you look at other areas of the world,” said Nick Olds, the senior vice president of oil sands for ConocoPhillips Canada, “it is very difficult to get access to (the) resource.” By contrast, the oil sands in Canada are “not state-controlled and they’re not government-owned.”

China, as a significant importer of Canadian lumber, is expected to increase its demand and push a long-suffering lumber industry into significant improvement. Lumber prices are now higher than they would have been in the U.S. housing cycle. Analysts named this phenomenon “The China Effect”.

“Add it all up, and the combination of firmer prices and a more competitive industry in Canada paints a very positive picture for profits in 2013 and beyond,” noted Leslie Preston in the TD Economics report.

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