Briefing highlights
- Some grim views of economy, loonie
- Cenovus boosts 2017 spending
Harsh views
As a group, economists aren’t all that upbeat on the outlook for Canada’s economy and its loonie. Then there are those who are downright gloomy.
Observers generally expect economic growth of just shy of 2 per cent next year, and a loonie that’s worth somewhere north of 70 cents U.S., but not all that far north.
Here are some of the bleaker forecasts from the past few weeks:
Bank of America Merrill Lynch forecasts gross domestic product will expand next year by just 1.5 per cent, and 0.4 of a percentage of point of that is thanks to Ottawa’s stimulus measures.
It also expects the loonie will sink to just 69.9 cents by the end of 2017, and that the Bank of Canada will be forced to cut interest rates again.
“We envision a meagre improvement in growth from 1.1 per cent in 2016 to 1.5 per cent in 2017, well below the median economist projection of 1.9 per cent,” said Emanuella Enenajor, the bank’s North America economist.
“The decline in business capital spending could slow, but export weakness could persist, as the BoC’s foreign activity indicator – a measure of external demand for Canada’s exports – has been worsening heading into 2017,” she added in a recent report.
“A gradual increase in energy prices could help stem the decline in natural resources hiring and capital expenditures. Services activity will likely continue to expand, but probably at a slower pace, with finance and real-estate sectors likely to come under pressure due to new mortgage rules.”
At this point, Ms. Enenajor expects Bank of Canada Governor Stephen Poloz and his colleagues, who on Wednesday presented a mixed outlook as it held its key rate steady, to cut the benchmark in July, 2017, though it’s hard to peg exactly when.
“The most important takeaway is that the BoC seems more willing than before to admit that the economy may not be able to pull itself up by its bootstraps and instead, may need further policy stimulus,” she said.
Ian Gordon, Ms. Enenajor’s Bank of America colleague, separately forecast the Canadian dollar will tumble to 69.9 cents by the end of next year, for several reasons.
“First, Donald Trump’s election increases the risk that NAFTA will be renegotiated or scrapped,” Mr. Gordon said.
“The latter is unlikely, but given 23 per cent of Canadian GDP is comprised of trade with the U.S., any developments along these lines will be CAD-negative,” he added, referring to the loonie by its symbol.
“The economic risks are not adequately priced by the market, in our view.”
Along with that is the expected divergence in the rate policies of the Bank of Canada and its U.S. counterpart, the Federal Reserve. While the former at the very least holds the line and the latter raises rates, possibly this month, the loonie becomes that much less attractive.
Several economists expect this, though they don’t see the loonie sinking that low, and also cite the fact that the American dollar’s strength should continue.
Also at play, of course, are oil prices, which have bounced since OPEC promised to cut production, giving the loonie a bit of a lift. Mr. Gordon’s forecast predated the OPEC pledge, though there are still questions over whether the oil-producing countries will live up to their promise.
Bank of America analysts had, at any rate, forecast higher crude prices for next year.
Alvin Tan of Société Générale also projects the Canadian dollar will be “weaker for longer,” expecting it to sink to about 71.5 cents by mid-2017. That’s not far off the 73 cents that Toronto-Dominion Bank chief economist Beata Caranci projects.
Noting the recent rebound in Canadian economic growth, Mr. Tan still raised red flags.
“Business investment continues to be sluggish following the end of the energy sector boom, and export performance has not met previously upbeat expectations,” he said.
“Newly announced mortgage tightening measures will also exert a negative impact on homebuilding activity.”
David Madani of Capital Economics also sees a hit from housing. And, like Ms. Enenajor, also expects the Bank of Canada to cut its benchmark overnight rate from its current 0.5 per cent.
Many other economists, for the record, see Bank of Canada Governor and his colleagues doing nothing through to some point in 2018, and then hiking.
“Over all, the bank still believes that the current amount of monetary policy stimulus is close to the right amount,” said Mr. Madani, his group’s senior Canada economist.
“Next year, however, we expect a downturn in housing activity to restrain the economy, prompting the bank to cut interest rates to 0.25 per cent.”
And this just in from HSBC: The big bank sees the loonie at 68.97 cents by mid-2017. It, too, predicts the Bank of Canada will cut rates, as early as January.
Cenovus to boost budget
Though the oil shock still hangs over Canadian producers, Cenovus Energy Inc. is boosting its spending and resuming its Christina Lake oil sands expansion.
“With the tremendous progress we’ve made over the last two years in reducing operating costs and sustaining capital, we’re confident we can move forward with projects that have strong potential to drive shareholder value,” chief executive officer Brian Ferguson said as he unveiled the company’s 2017 budget.
Cenovus said it plans to invest between $1.2-billion and $1.4-billion, an increase of 24 per cent from what it forecast as 2016 capital spending.
It added it will raise total oil production by 14 per cent.
“The 2017 budget includes capital to resume construction of the phase G expansion at Cenovus’s Christina Lake oil sands project and to invest in attractive conventional oil drilling opportunities with high-return potential in southern Alberta,” the company said.