In August, I compared the coverage of the Republican nominee for president of the United States to Stranger Things, the Netflix show about a dark and dangerous parallel universe called “the Upside Down.” And now here we are, in the Upside Down. Nobel laureate Michael Spence calls it the “old normal”—a place where crude national self-interest will be the basis for everything governments do. That won’t necessarily be disastrous. But don’t let anyone tell you that he or she knows what Donald Trump, the Brexiteers, Indian Prime Minister Narendra Modi or other ascendent nationalists have in store. There is no playbook for this new–old world order.
Unfortunately, all of this has come at the end of a calendar year, when irresistible forces compel people like me to say something about the 12 months to come. Canada has endured consecutive years of some of the weakest growth on record. Might things change for the better in 2017? There is reason to think so. It will depend on the extent to which entrepreneurial atrophy has set in.
Since we know little of how things work in the Upside Down, I have a lodestar. The Bank of Canada’s quarterly economic reports have a list of things that could upend the outlook. In the October report, there were five: stronger-than-expected U.S. growth; higher-than-expected oil prices; the possibility that weak business investment had altered the economy’s potential; slower growth in less advanced economies such as China; and a tilt to saving from spending by Canada’s heavily indebted households.
Let’s go in reverse order. Canada’s household savings rate was 5.8% in the third quarter, an increase of one percentage point from the previous quarter and the highest since early 2001. Spending also increased, but by nowhere near as much. Heavily indebted households can no longer be relied on as the main driver of economic growth.
Corporate debt in China exceeds 250% of gross domestic product, and the government has put restrictions on international investment because the value of the yuan was falling so fast. So there are reasons to feel queasy about the world’s second-biggest economy. Still, most experts think Beijing will avoid the worst. Elsewhere, Brazil and Russia will escape recessions in 2017. India is as chaotic as ever, but continues to grow faster than any other major economy. Canadian business investment is a concern, but difficult to handicap at this stage. (More on that in a moment.) Oil prices jumped after OPEC surprised the world by agreeing to a cap on production.
So at this point, 2017 is looking about as uninspiring as it did before the presidential election: Higher oil prices are offset by weaker household spending, while the prospects for emerging markets and business investment remain somewhere between bleak and unsatisfactory. That brings us to the big one: the U.S. economy.
For years, the Republican majority in Congress blocked President Barack Obama from spending billions of dollars on infrastructure. But next year, it will clear a path for Donald Trump to do so. The White House and Congress will also team up to cut corporate and personal taxes. The effect will be substantial. The OECD foresees growth of 2.3% in 2017 and of 3% in 2018, compared with the Bank of Canada’s pre-election forecast for U.S. growth of about 2% in each of those years. Canada’s central bank could be raising interest rates sooner than it might have expected pre-Trump. As Washington legislates its fiscal measures, more of Prime Minister Justin Trudeau’s infrastructure money will be spent. The short-term hasn’t looked this good since the commodity boom.
Yet I can’t shake the feeling that there is something hiding in the dark. Trump has a mandate to make life difficult for America’s trading partners that he could use at any time. Our companies may not be ready for such a challenge. Business investment has been declining since the end of 2014, and companies haven’t spent less on intellectual property since the early 2000s. The Upside Down will offer opportunity—but only if our companies are ready to seize it.
MORE ABOUT ECONOMIC GROWTH:
- Prepare for a gap to open between Canadian and U.S. interest rates
- Donald Trump’s election hasn’t changed the Bank of Canada’s strategy—yet
- The Bank of Canada is changing how it talks to Bay Street
- How globalization is changing the game for central banks
- How to invest in the age of permanently low interest rates
- Canada is primed for an exporting boom. So why isn’t it happening?
- Low interest rates are screwing up the way we value companies
- Bank of Canada’s Stephen Poloz to Bay Street: Can you hear me now?
- The Bank of Canada doesn’t really know why the economy is so lousy right now