With the United States-Mexico-Canada Agreement (USMCA) came a collective sigh of relief. Now that U.S. sabre rattling is behind them, Canadian businesses have a lot of opportunities, says Peter Hall, chief economist at the Export Development Canada (EDC). Legislators in the three countries still need to pass the deal. Though interest rates threaten to curtail domestic investment opportunities somewhat, the climate is one of calm, he says. With stable commodity prices and a projected rise in currency, he sees Canada’s GDP rising by another 2.1 per cent next year.
“The trade sector is overperforming and being a backstop to the Canadian economy,” he says.
The EDC projects greater growth outside of Canada’s borders. U.S. growth is expected to increase at 3 per cent this year to 3.3 per cent in 2019. And it is expected that emerging markets as a whole will grow by 4.7 per cent in 2018, and 4.6 per cent in 2019.
Now that it is done, would you say the USMCA is a good deal for Canada?
I watched that with bated breath. It’s a massive relief. There’s plenty of growth around and businesses have been going about facilitating that growth despite all of the mayhem swirling around them. Businesses are wondering: How do we optimize in a situation like this?
What they are bumping into are capacity constraints. The big downer for non-resolution of something like the USMCA is that uncertainty. That’s what we’ve been hearing for the last while. I’ve had a very clear message: that investment is being held back. And now that our dominant risk is out of the way, we can get on with investing with more clarity. There’s a great deal of modernizing that has gone into this.
What threats continue to exist for Canadian businesses?
Populism is probably the first. Populism is nothing new. It really started in countries that couldn’t afford to stimulate their economies with spending as much as OECD nations could. It’s only gained momentum since then because there is a significant number of people who have been left behind in this post-recession growth. Those people are not happy with the system. In spite of the fact the economy is doing really well right now – we have low unemployment rates – the lingering effects of that resentment are going to take a while to overcome.
The second is protectionism, which is one of the manifestations of this populism. Prior to the inking of the USMCA, there were many out there who felt globalization was really at risk. That has not happened with the signing of this deal. There was a lot of bluster and banter that was aimed at people around the table – and it was really around getting better deals. So, if that’s setting a precedent for us going forward, then we have more clarity on what protectionism is really about. Is it going to be a permanent feature of how we are going to operate, or is it a tool we are going to use to craft better deals? We’re siding with the latter.
The U.S. has projected growth of 3.3 per cent. What’s driving that?
The rebound we never had after the great recession. And that’s controversial. There isn’t consensus on that. Many are saying we are on the verge of the next recession. We’re saying there’s a true recovery of the cycle and there’s a lot of capacity.
The Canadian growth projections are less optimistic.
We have a debt-to income ratio on the personal side that is 172 per cent and climbing. And that’s greater than it was in the U.S. just before the great recession and the financial crisis. So that’s scary. The second thing is our housing market has been building new homes in excess of demographic requirements for quite a number of years now. With interest rates rising, there’s a real vulnerability there. Are we set up for a recession? No, because another chunk of our economy – the export side of things — is actually doing very well because of this global growth. The trade sector is overperforming and being a backstop to the Canadian economy.
What situation is Mexico in given the change in government?
Mexico is enjoying having clarity around the deal as well and primarily before the new regime takes over. That’s added a lot of potential uncertainty because it wasn’t apparent to anybody how Andrés Manuel López Obrador would take over. Given Mexico’s dependence on foreign direct investment for the last 10-20 years – and it’s a key part of annual growth – this is a huge relief.
Should Canadian exporters look farther afield?
The U.S. is our No. 1 client – there’s no doubt about that. It just so happens the U.S. isn’t leading the charge on global growth. Diversification is always a great strategy. The good news is that we are actually diversifying. The merchandise trade that we have been sending to emerging markets has grown as a share of total exports from 5 per cent back in 2000 to somewhere between 13 per cent and 14 per cent now – that’s a remarkable change in a short period of time. Given that we have an enlarging presence inside those fast-growing emerging markets and they are expected to outgrow the developed world – our traditional customers – then that gravitational pull is going to transform our overall growth prospects as we go forward.
Are there any currency or financing issues on the horizon?
Interest rates are going up. Everybody is concerned when interest rates start rising, especially because they haven’t done that for a very long time – we’re going on a decade of ultra-low interest rates. That’s going to take some adjustment; that pushes back on investment. The growth will continue to be there – even with rising interest rates it’s a safe environment to invest in.
What specific advice do you have for Canadian businesses in the aftermath of the USMCA deal?
Protectionism isn’t over. And a lot of people are running away from the protectionism. Our belief is that it is a temporary tool that will be used to get better deals and that ultimately we will have deals and trade with the rest of the world. If that’s the case, businesses in Canada can run into the void that is being left by business fleeing this protectionism. There is a great opportunity to get into supply chains. Now that we have USMCA, there’s a lot of investment that’s been held back that we believe is coming into the marketplace. Canadian businesses that have wanted to invest can do so with much more certainty.
Responses have been edited for clarity and length.