Canada looks set for another year of modest economic growth

The underlying economic picture is more favourable than a glance at the headlines may suggest
By Jock Finlayson, Executive Vice President, Business Council of British Columbia

The early weeks of 2015 have been a reminder that we live in a turbulent and risk-prone world. From plummeting oil prices to terrorist attacks in France, jittery stock markets, slowing growth in China, and renewed political uncertainty in Greece, there has been much to capture the attention of those inclined to fret about the future. But the underlying economic picture is more favourable than a glance at the newspaper headlines may suggest.

Begin with developments in energy markets. The stunning 60 per cent drop in oil prices since last June has taken forecasters by surprise and is reshaping the international economic and geopolitical landscape. Among other things, the oil price slump heralds economic and fiscal pain for jurisdictions – like Canada – that are significant net exporters of hydrocarbons. But for most people, what transpires in energy markets mainly affects us as consumers.

And here the news is positive. In aggregate, the global economy should get a lift from cheaper oil, with all of Canada’s major trading partners – the U.S., China, Japan, and Europe – positioned to gain. If current oil prices are sustained over 2015, Canadian households can look forward to $10 to 12 billion boost in spending power, thanks to lower costs for gasoline and other fossil fuel products. The benefits for consumers will partially offset the damage that sagging oil markets are sure to do to business investment – energy recently has accounted for more than one third of non-residential capital spending – and to Canada’s balance of trade.

The steadily improving U.S. economy is the most important external factor affecting Canada’s prospects in 2015. From 2010 to 2013, America’s economy grew at an average annual rate of 2.2 per cent, barely half the pace recorded in previous post-Second World War recovery cycles. But the sputtering U.S. economic engine finally kicked into gear in 2014. Real gross domestic product (GDP) advanced by more than 4 per cent over the second half of the year, accompanied by a visible pick up in job creation. Indeed, the U.S. has added more than 200,000 net new jobs in each of the past 11 months, with 2014 marking the best year for job creation since 1999. Forecasters anticipate that U.S. real GDP will expand in the vicinity of 3 per cent in 2015, along with continued solid job growth and rising housing starts.

True, the country still has some distance to travel to get back to a healthy overall economy. Labor force participation remains substantially lower than it was in 2007. And median household income, which fell sharply over 2008-11, has still not returned to its 1996 level, measured on an after-inflation basis. Hopefully, stronger economic growth will lead to tighter labour markets and higher wages for more American households over the course of 2015-2016. In this environment, more Canadian industries should reap dividends as our largest export market continues to revive.

Trends in interest rates and borrowing costs will also bear close scrutiny as 2015 unfolds. Mortgage and prime lending rates in Canada remain near all-time lows, with 10-year Government of Canada bond yields posting further declines from already low levels late last year. The U.S. Federal Reserve has ended its epic bond-buying program (“quantitative easing”) and is expected to start nudging its short-term policy interest rate higher in the second half of 2015. Rising U.S. rates may be felt in Canadian financial markets, even though the Bank of Canada is likely to lag the U.S. central bank in hiking its own policy rate. Borrowers who have grown accustomed to six years of rock bottom interest rates may be jolted as rates begin to creep higher.

But it’s important to keep a sense of perspective. Adjusted for inflation, interest rates in Canada will stay very low over 2015-16, and any increases in borrowing costs are likely to be gradual and measured.

Add it all up, and Canada looks set for another year of modest growth, with real GDP expected to increase by 2.0 to 2.5 per cent on the back of a rebounding U.S. and a more competitive exchange rate. Continued low interest rates should provide ongoing support to consumer spending and housing market activity. The breathtaking collapse in oil prices will take a toll on Canadian exports and business investment in 2015 and produce a different pattern of economic growth across the provinces, but most households in every region stand to gain from lower energy costs.
Jock Finlayson is Executive Vice President of the Business Council of British Columbia.

Article provided by Troy Media, http://www.troymedia.com.

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