Stop worrying about the Canadian economy in 2014

By Kevin Press,

The Canadian economy will grow by more than 2% this year. That’s thanks mainly to a solid rebound in the U.S.


Would it surprise you to hear that Canada’s main stock index, the S&P/TSX Composite, is up year-to-date? It may only be a couple of percentage points, but given all the hand-wringing at the end of January, you’d think our frigid winter sky was falling. Not true (thankfully, because I’ve had it with the shovelling).

But while there are precious few signs that spring is on the way, there is reason for optimism. That’s the key message in a new report on the North American economy by Sal Guatieri, senior economist at BMO Capital Markets. Canadian gross domestic product (GDP) growth will hit 2.3% this year, according to Guatieri. Unemployment will end 2014 at 6.8%. That’s due largely to projected U.S. growth.

“If not for a stronger U.S. economy, we would be stuck at a sub-2% growth rate for another year,” said Guatieri in an interview with me yesterday. “The pickup in growth for Canada is all due to the expected pickup in the U.S. economy. A small part is due to the weaker Canadian dollar.”

Guatieri made four key points:

  • Solid consumer spending and positive results from the energy sector powered the Canadian economy to a strong second half in 2013. Car dealers had a record year, as I wrote about in August. Home sales came back after a disappointing 2012. We have a bit of momentum to work with. 
  • We’re not done with the economic headwinds. As we heard in yesterday’s budget announcement, the federal government is determined to reestablish fiscal prudence, having spent big dollars to stimulate the economy after the financial crisis. And consumers — weighed down by record levels of household debt — aren’t in a mood to spend either. “There’s too little left in the domestic tank to get us on a higher growth track,” said Guatieri. “The housing boom of the last decade and the consumer borrowing boom, those two areas are tapped out. And governments are cutting back. So there’s nothing on the fiscal side that could kick our growth up. If anything we’ll see a modest fiscal drag this year and next. Business investment likely will not strengthen until exports come back and manufacturing activity picks up.” 
  • The Canadian dollar is weakening. While this is driven by concerns about the domestic economy and the emerging markets we depend on so much for our commodities, a lower loonie is good for Canadian exports to the U.S. Watch for the dollar to hit a low of US87₵ before recovering to better than US90₵ later in the year. 
  • An overnight rate cut is still possible. It’s not likely, though. Given Guatieri’s GDP forecast and moderate inflation expectation, the Bank of Canada’s next move will probably be up. Don’t count on that happening until the third quarter of 2015, though.

I asked Guatieri how worried he is about emerging markets.


“We think in most cases further turmoil in emerging markets will be contained,” he said. “We won’t see the global financial spillovers that occurred in 1998 during the Asian financial crisis. Much of the turmoil we’re seeing in emerging markets now is very country-specific. It’s a reflection of unsustainable economic systems and unstable political systems in countries like Argentina, Venezuela and Turkey . . . Now, if some of the bigger countries face more uncertainty or financial instability — we’re talking India, China and Russia to some extent — that would be a bigger problem. But we think for the most part weakness in those countries will be contained. We don’t expect much further weakness in their economies to an extent that would undermine commodity prices and Canada’s economy.”

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