The heated economic growth that Canada is now seeing will likely taper off later this year as stimulus spending fades, the housing market cools and the Canadian dollar starts to bite, a report to be released today cautions.
Growth in the second half of this year won't look nearly as strong as the first half, Export Development Canada said in its semi-annual outlook.
It's not alone: the Bank of Canada said last week it believes activity will moderate through this year and next, owing to the strong dollar, the winding up of fiscal stimulus projects and the ebb of a rush to buy houses ahead of an interest rate hike.
"There's going to be a let-up in growth. It's not until the end of the year when balance will be restored across the economy, and that's when we'll get a more underlying fundamental recovery," Peter Hall, EDC's chief economist, said in an interview.
While economic activity this year has so far surprised economists by its buoyancy, EDC says the pace will subside to below 2 per cent in the second half. It sees the economy growing 2.5 per cent this year, putting it at the low end of economists' forecasts.
Global demand remains uneven and, in some spots, weak. Major indicators, such as housing starts, suggest economies in the United States and Europe are still running at a tepid pace, and that is capping demand for Canadian exports.
"Our feeling is that you can have a solid domestic economy, but you can only get so much out of that before you need an export sector that's driving things along," Mr. Hall said.
Canadian exports account for 30 per cent of the country's gross domestic product. Though the export picture has improved in recent months, the value of exports remains 23 per cent below the peak in July, 2008.
The Canadian dollar is another major headwind. EDC believes the currency, now roughly at parity, is overvalued by about 10 cents, given what fundamental factors suggest commodity prices should be.
Even so, more Canadian companies are realizing a strong dollar is here to stay and are adapting their strategies accordingly, Mr. Hall said.
Demand in much of the developed world remains soft, and a sustainable global recovery is still "elusive," he added.
"Genuine recovery requires a much more sustained, aggressive growth pace than we have experienced to date," Mr. Hall said. "Simply put, we are still on the way, but we're not there … yet."
But he added that economies are humming in many developing nations, with India and Brazil set to post strong growth this year.
The agency believes exports will rise 11 per cent this year, after seeing the worst year on record in 2009. Next year, exports are seen climbing 7 per cent as "true, sustainable growth" begins.
Tavia Grant