CIBC report scales back post-oil-shock recovery for Canada

Outlook calls for a weaker Canadian dollar to help stimulate exports and capital spending

After absorbing the worst of what the oil shock could dish out, the Canadian economy is in better shape, but real GDP growth will fall short of 2 per cent in each of the next two years, finds a new report from CIBC Capital Markets.

“As it seeks to replace the role previously filled by energy sector capital spending, Canada will find that there’s a longer fuse for the stimulus now in place to spark a return to full employment,” says Avery Shenfeld, chief economist, CIBC. “Anemic capital spending plans, even outside the energy sector, suggest that the draw of a cheaper dollar isn’t yet enough to offset sluggish global growth and the resulting lack of pressure to add fresh capacity.”

CIBC trimmed its growth rate for 2017 to 1.8 per cent from 2.1 per cent. The forecast for 2018 holds steady at 1.9 per cent real GDP growth.

“By today’s standards, these subdued growth rates might be counted as good years, fast enough to narrow economic slack,” says Mr. Shenfeld. “Growth will be sufficient to make at least some gentle progress towards eliminating slack and restoring full employment – not enough for the Bank of Canada to hike rates before mid-2018, but with core inflation sticky, enough for the central bank to eschew a further rate cut.”

He points to the headwinds of elevated inventories of autos, chemicals and machinery stateside – which are key target markets for Canadian exports – dissipating in the next few quarters. That will help to support profits and capital spending plans by 2018. But, in the coming year, the best news for capital spending will be that its pace of decline will ease off, the report says.

While the timing is still fuzzy on the federal government’s infrastructure spending, that should add just over half of one percent  to Canada’s real GDP growth next year, says Mr. Shenfeld.

In contrast, home building has likely peaked in terms of its contribution to economic activity, the report says. Despite strong housing demand in southern Ontario, national start levels will grind lower to 182,000 next year and 178,000 in 2018.

To see an eventual upturn in capital spending and an improvement in non-energy exports, Canada will need to retain the more competitive exchange rate range that has prevailed since oil prices dropped in 2014, says Mr. Shenfeld.

The upward creep in oil prices next year on its own would tend to push the loonie a few cents stronger, he says. But, countering that will be higher interest rates in the U.S. next to a stand-pat Bank of Canada. Canada-U.S. overnight spreads are expected to widen by 75 basis points, reflecting three U.S. Federal Reserve rate hikes while the Bank of Canada holds rates steady.

“A longer wait for the Bank of Canada tightening has us weakening our 2017 forecast for the Canadian dollar bythree cents versus our prior call, with a total decline of four cents from now to the end of 2017,” says Mr. Shenfeld.

He forecasts the loonie will decline to 73 cents U.S. by the end of next year.

It’s also a mixed picture for consumer spending.

“Firmer gasoline prices will eat into household buying power, without being enough to spark a boom in oil industry employment,” says Mr. Shenfeld. “The longer-than-expected fuse to ignite export growth has also meant that job performance in high-paid tradable industries has been lacklustre, even beyond the expected retrenchment in energy.”

Looking ahead, energy and manufacturing payrolls should stabilize by year’s end, and abetted by hiring tied to infrastructure spending, Canada’s employment growth will accelerate to 0.7 per cent next year and 1.1 per cent in 2018, he says. Consumer spending power will also get a lift from the arrival of more generous federal child benefit payments to families with children, he adds.

Corporate profits should garner support as energy prices rebound and softness in the labour market contains compensation rates.

“Workers, like Canadian policymakers, will have to wait more patiently for the prize of full employment,” says Mr. Shenfeld.

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