Consensus on the economy is hard to come by at the best of times, but these days, the difference of opinion seems especially pronounced. Private-sector economists are pointing to a surfeit of positive data, while Bank of Canada Governor Stephen Poloz remains wary (or, as Poloz himself put it at press conference last week, “decidedly neutral”). Meanwhile, the central bank’s own forecast pegs GDP growth at 2.6 per cent this year, which makes Canada one of the fastest growing economies in the developed world. Here’s why there’s cause for some—but not too much—celebration.
The good news
The country’s GDP is indeed ticking up. The energy sector is recovering and no longer weighing so heavily on economic growth (it’s not likely the industry will help drive GDP any time soon, however). A wide swath of the economy is contributing to Canada’s GDP gains, notably manufacturing, wholesale and retail trade, according to the Bank of Montreal.
But some of these gains might be temporary. The recent strength in retail sales, for example, could be driven by extra cash in consumers’ pockets from the Canada Child Benefit rolled out last year. Similarly, the red-hot Toronto real estate market, which has seen double-digit price growth, is playing an outsized role. “The contribution of housing sector growth this year has been revised up substantially,” Carolyn Wilkins, senior deputy governor, noted in her remarks. That’s not expected to last.
Job growth has been another bright spot of late. Scotiabank notes the annualized pace of employment growth since last July roughly matches the all-time record set way back in 1979. Canada is also now matching the U.S. in this regard. Even hard-hit sectors such as manufacturing have seen gains recently. Alberta, still on the mend, has experienced an uptick of more than 20,000 jobs since the start of the year, too.
The unemployment rate is also falling, though it hasn’t quite reached pre-recession levels. What’s more, full-time job growth has kept pace with part-time over the past year. “We can’t point to a lack of quality jobs,” BMO chief economist Douglas Porter wrote in a note this month.
The number of housing starts across Canada has been defying expectations lately, and the surge in activity is contributing to economic growth, too. In fact, housing starts hit the highest level in roughly a decade, according to the Canada Mortgage and Housing Corp. Construction of apartment and condo buildings is responsible for most of this growth. The numbers are so strong that some economists are cautioning the Ontario government about implementing measures to cool the housing market. “There is a solid case to be made in these numbers for how the supply side may be responding to affordability challenges and that the market, left to its own, is finding solutions,” Derek Holt, head of capital markets economics at Scotiabank, wrote this month.
The bad news
One of the most frustrating issues for Poloz is the country’s weak export growth, especially outside of the energy sector. The export recovery has been uneven, and the pace is not what the central bank is hoping for (“Exports were okay, but not great,” Poloz recently told Maclean’s). After three straight months of trade surpluses, Canada sunk back into a deficit of $972 million in February with exports falling 2.4 per cent. In the past, the Bank of Canada has chided exporters for their lack of competitiveness and heavy reliance on a low dollar. The protectionist sentiment and general uncertainty around U.S. President Donald Trump’s economic plans, including the potential for a border-adjustment tax, is another reason why the Bank of Canada remains worried about exports.
The central bank’s Business Outlook Survey provides further reason for concern. The chart above indicates that, on balance, Canadian businesses have not seen an increase in sales growth for almost two years. Respondents to the survey are optimistic sales will grow over the next year, for what it’s worth.
Whether businesses will act on their optimism and start investing again is debatable. So far, the trend is not good. “Actual business investment has imploded over the past two quarters,” notes Holt at Scotiabank. It’s been a primary concern for the central bank, too. Business investment is a relatively small share of GDP (about 12 per cent) but it’s an important indicator of future expectations, and drives all sorts of other economic activity. Back in 2014, investment was well above its pre-recession peak—and then the oil crash hit. The Bank of Canada estimates that investment in the oil and gas sector plummeted by nearly 50 per cent in the past two years. That recovery is ongoing, but in a speech last month, deputy governor Lawrence Schembri noted geopolitical and economic uncertainty are still hampering investment.
Despite the country’s strong employment growth, wages haven’t been keeping pace. In March, wages ticked up just 1.1 per cent compared to the year before, and are growing at the slowest pace since 1998, according to Scotiabank. The continued fallout from the oil price crash might have something to do this, Holt notes. Some of those who lost their jobs in the oil sands are working again, sure, but not at the six-figure salaries they once enjoyed. Unless investment in the oil patch picks up, wage growth could continue to be underwhelming.
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