Five things that could send economic forecasts off course in 2017

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If 2016 taught economists anything, it's that if you can't predict the unexpected, you should at least be prepared for it. It's a lesson forecasters will want to keep in their back pocket for 2017.

The past year produced a series of major unforeseen events that threw a wrench into Canadian and global economic assumptions. The utterly unpredictable Alberta wildfires have twisted Canadian economic data out of shape for six months, and counting. Internationally, the Brexit vote in Britain and the election of Donald Trump in the United States were, at best, seen as extreme long shots when the year began.

Those events continue to cloud the view as economists draw up their outlooks for 2017 – which already looks like a year of changes that could prove very hard to predict.

Most forecasts for the Canadian economy share common ingredients: A bottoming of the oil-shock effects; growth in non-energy exports; a modest pick-up in business investment; a growing contribution from federal government infrastructure stimulus; and a modest to moderate slowdown in housing. It all adds up to a median growth estimate among economists of 1.8 per cent – a modest pace by historical standards, yet downright humming compared with the average annual pace for the past two years of about 1.1 per cent.

But the year begins with a multitude of wild cards – some of which are barely blips on the typical forecaster's radar. Let's consider some of the possibilities that could send 2017's forecasts seriously off course.

The Trump card

Pretty much everyone cites one big looming uncertainty to their forecast. Its name is Donald Trump.

How the U.S. president-elect's campaign rhetoric ultimately translates into policy could have significant effects on Canada, which relies on the massive U.S. market for three-quarters of its exports.

A protectionist trade agenda could hurt Canadian exports (if Canada is targeted) or help them (if Canada is spared while chief competitors Mexico and China face higher tariffs).

Mr. Trump's spending plans could accelerate U.S. economic growth, which would raise demand for Canadian goods, or escalate U.S. inflation, which would raise interest rates in global financial markets and increase borrowing costs for Canadians.

The incoming president's foreign policies could raise geopolitical tensions and further undermine already-weak business confidence globally – or not.

"Economic forecasts have barely changed since before the U.S. election. I do not think that means the election outcome will have little effect on economic and financial market performance in 2017. I think it means that forecasters are a little bit like deer in the headlights, frozen because they don't know which way to jump," veteran Canadian economist Ted Carmichael said.

China blues

As if the Chinese economy's deepening slowdown and increasingly alarming credit excesses weren't enough, the election of Mr. Trump has raised the risk of a trade war, or perhaps even a bigger conflict, involving the world's biggest economies.

During his campaign, Mr. Trump threatened to impose heavy tariffs on Chinese imports. And shortly after his election, Mr. Trump's decision to break long-standing diplomatic protocol and have a phone conversation with the leader of Taiwan (a self-governing island off the Chinese coast that China steadfastly insists falls under its authority) has been perceived as a none-too-subtle challenge to China's sovereignty over the region.

Should the tensions between the two powers escalate on either front, it could both interrupt global trade flows and trigger a disruptive re-drawing of international trade linkages.

At very least, "It's a non-trivial incremental risk to global trade," said Carl Weinberg, chief economist at High Frequency Economics, an independent economic research firm based in Valhalla, N.Y.

Make Alberta great again

After the past two years of misery, the Alberta economy has nowhere to go but up. And the way things are starting to line up, it wouldn't be out of the question for the beleaguered province to go from worst to first in provincial growth in 2017.

Bank of Montreal chief economist Douglas Porter noted that with oil prices rising following the recent deal among major crude exporting countries to curtail production, forecasts for an average price of about $55 (U.S.) a barrel in 2017 now look to be on the low end.

"There's certainly a credible scenario where oil prices are stronger than that – and possibly much stronger than that," he said.

The province's economy should also benefit from rebuilding in areas heavily damaged by the wildfires, and stimulative fiscal policies from the provincial government. With capital spending in the energy sector finally appearing to have bottomed out at less than half of what it was prior to the late-2014 oil crash, and with companies in the sector having already made deep cuts to bring costs down, there is a lot of potential room for investment to come in off the sidelines if oil prices climb into the $60s or $70s a barrel.

Dutch disease

Political upheaval in Europe could be a major theme for the global economy in 2017. Britain will continue down its uncertain path toward an exit from the European Union, and Italy's recent constitutional vote has left its future in the economic union uncertain. Key EU members France and Germany have elections in 2017, and those will attract enormous attention amid the growing populist political sentiment across the continent.

But one election in 2017 could jump up to snatch the headlines: The Netherlands.

If the March 15 vote were held today, the far-right Party of Freedom would win power, bringing with it an unashamedly anti-immigrant, anti-Muslim, anti-EU doctrine. A victory, which looks like a serious possibility, would open another wound in the damaged union, and could start a domino effect of populist sentiment in other European elections (the French vote in April, the Germans in late summer or early fall).

Fiscal failure to launch

The financial markets have acted enthusiastically to Donald Trump's election win, on the assumption that his proposed policies would provide substantial fiscal stimulus that would both accelerate U.S. growth and increase inflation, and drive up interest rates in the process. But what if it never happens?

Bank of Montreal's Mr. Porter suggests that's a legitimate possibility; at very least, the anticipated stimulus might not materialize meaningfully in 2017. He notes that many of Mr. Trump's colleagues in the Republican Party will resist boosting government spending, "and Trump himself has talked about eliminating the deficit."

And as Canadians can attest with their own federal government's pledges to sharply increase infrastructure investment, Mr. Trump may find the going very slow to get a major infrastructure-spending program off the ground and delivering economic gains.

If Mr. Trump were to delay and/or scale back his plans, Mr. Porter said, the bond markets may reverse their expected course in 2017. "Interest rates could actually begin to retreat again," he said.