It was a bumpy year for the Canadian economy, as concern over European debt and the U.S. “fiscal cliff” cast a shadow over growth. Canada’s economy hit a soft patch in the second half of the year, and see-sawing trends in job creation weren’t enough to budge the unemployment rate much. So what will 2013 bring? Here are two economists – an optimist and a pessimist – on what the coming year heralds for Canada.
What will be the main factors generating growth – and what are the chief risks?
Craig Wright, chief economist at the Royal Bank of Canada, Toronto, predicts the Canadian economy growing about 2.4 per cent next year.
As the cloud of economic uncertainty lifts in Europe and the U.S., we expect economic activity in Canada to strengthen modestly through 2013. Support for economic growth will be relatively balanced, with contributions from consumer spending, investment (outside of residential real estate) and exports. This support will be offset by weakness in housing-related activity and a slowdown in government spending. One key factor supporting growth is the relative health of corporate balance sheets.
Risks to the outlook are roughly balanced. On the downside, any back-tracking by policy makers in Europe or the U.S. will continue to hold down confidence and the economy – particularly given the consumer deleveraging needed in Canada. On the upside, monetary conditions are extremely accomodative and could translate to an acceleration in growth as confidence in the global economy improves.
Joshua Dennerlein, U.S. and Canada economist with Bank of America Merrill Lynch in New York, sees the economy growing by about 1.4 per cent next year.
Consumer and business investment have been the primary drivers of the Canadian economy since the recession ended. We expect that to continue in 2013, although we look for weak foreign demand and a slowing housing market to weigh on growth. Domestically, the biggest risk is high household leverage ratios, which increase risks to the financial system and can amplify shocks. External risks to growth include the resolution of the U.S. fiscal cliff and the European sovereign debt crisis.
Much of Canada’s outlook for next year rests on the outcome of talks over the U.S. fiscal cliff. What is your base-case scenario for how those events will affect Canada?
CW: Our base case for the U.S. economy is one of growth continuing at the 2 per cent to 2.5 per cent pace. Implicit in this forecast is a view of a fiscal curb rather than a fiscal cliff – meaning that support from fiscal policy is expected to be a step lower, rather than falling off a cliff.
The restraint should take away a little over a percentage point from economic growth in 2013, consistent with a gradual path towards fiscal consolidation. This restraint will moderate economic activity in the U.S. and act as a headwind for Canadian exports. A rough rule of thumb: every percentage point reduction in the U.S. growth rate translates into about 1/2 of a point hit to Canadian economic activity.
JD: Our U.S. team expects a fiscal tightening of 2 percentage points of GDP to weigh on U.S. growth. Since Canada’s economy is highly sensitive to the U.S., we expect this weakness to spill over the border primarily through trade and confidence channels.
Exports have been hampered by uneven global demand and persistent strength of the Canadian dollar. How do you think trade will fair next year?
CW: Canadian exports rose in 2012 despite headwinds from the sluggish U.S. recovery and the strength of the Canadian dollar. While we expect similar growth in the U.S. in 2013, the composition of growth should prove to be more favourable to Canadian exports. The sectors that Canada exports to – autos, housing and equipment and software – are where we are looking for stronger growth over the course of 2013. This suggests that the support from trade will turn in to an addition to overall activity in Canada.
JD: Trade is unlikely to return as the engine of the Canadian economy in 2013. The biggest headwind remains weak foreign demand, especially from the U.S., Canada’s largest trading partner. The strong Canadian dollar and poor productivity growth of the last several years should persist in 2013 as well.
Our jobless rate is 7.2 per cent. How will the labour market fare in 2013?
CW: The Canadian labour market has tracked better than expected with the majority of jobs being full-time and private sector, while unemployment has fallen below its long-run average of 7.8 per cent. Moving through 2013 we expect monthly employment gains to average around 20,000. New entrants into the labour market will limit improvement in the unemployment rate from here, however, easing to 7 per cent by the end of the year.
JD: Labour market healing will likely stall for most of the first half as the U.S. fiscal cliff induced slowdown spills over into Canada. We expect the unemployment rate to rise over the next several months as weak growth stunts hiring. We forecast growth to pick up beginning in the second half of the year, helping to reverse much of the earlier rise in the unemployment rate; however, unemployment is likely to remain at or above 7.2 per cent at the of the end of 2013.