A couple of months ago, Canada's economic outlook for 2016 looked considerably brighter than 2015. Now, the country appears headed for another year of subpar growth – and will need a little luck to avoid a repeat of last year's close-to-recession performance.
That was the general message from the chief economists of Canada's five biggest banks Tuesday morning, as they held their traditional early-January get-together at the Economic Club of Canada's annual economic forecast breakfast in Toronto. After a year in which the Canadian economy scratched out estimated growth of 1.2 per cent – which, as Bank of Montreal chief economist Doug Porter pointed out, was the weakest year, outside of a recession, that Canada has recorded in more than 50 years – the economy might not do much better than 1.5 per cent in 2016.
The outlook has crumbled quickly from relatively strong growth seen as recently as the mid-October federal election to the prospect of another below-potential year. The latest blow to the outlook came in a report just before Christmas, estimating that gross domestic product was flat in October, on the heels of a decline in September.
"In the immediate aftermath of the election, we believed that with the potential fiscal stimulus that the new government was delivering, and a still relatively solid U.S. economy, that we could be looking at growth of as much as 2.5 per cent in the current year," Mr. Porter said. "But with the latest sag in commodity prices, the weakening global backdrop and a run of bad economic data at the end of 2015, we now think that the Canadian economy will do well to even get above 1.5 per cent in the current year.
And Toronto-Dominion Bank chief economist Beata Caranci suggested that even this is predicated on three favourable factors that the economists believe will help keep the Canadian economy afloat: a weak Canadian dollar that will spur exports, continued low interest rates to encourage borrowing and spending, and "some sort of rebound" in prices for oil and and commodity prices from their current multiyear lows.
She said the key risks to the Canadian economy over the next couple of years lie in "some combination of these three" not panning out. If that happens, it could mean "a repeat year of what we saw in 2015, where we get closer to 1-per-cent growth rates instead of 2 per cent," she suggested.
The panel of bank chief economists – which also included Avery Shenfeld of Canadian Imperial Bank of Commerce, Royal Bank of Canada's Craig Wright, and the soon-retiring Warren Jestin of Bank of Nova Scotia – agreed that oil remains the key thorn in Canada's economic side. They said the price for benchmark West Texas intermediate crude could rebound to something near $60 (U.S.) a barrel this year, which would help inject some life into Canada's energy sector. But crucially, that price wouldn't be sufficient to kick-start investment in Canada's relatively high-cost oil sands – meaning that business investment, which was a big drag on growth in 2015, would remain a vital missing ingredient.
"Sixty-dollar oil can reinvigorate some [U.S.] shale. Sixty-dollar oil will not reinvigorate multibillion-dollar investments in the oil sands in a way that will push Alberta and Canada forward," said Mr. Jestin, who pointed out that the energy sector accounted for more than one-quarter of Canada's total business investment before the plunge in oil prices. And Mr. Shenfeld noted that any price rise that would encourage more U.S. shale-oil production would subsequently keep a lid on further price increases, as U.S. supplies would add to a generally oversupplied market.
Mr. Porter predicted that resource-sector investment will decline another 20 per cent in 2016. As a result, he forecast, overall business investment will drop by about 3 to 4 per cent this year, on top of a slump of an estimated 7 per cent in 2015.
The prospect of 1.5-per-cent growth is below the estimated potential output of the economy (the pace that growth could be sustained without eating up spare capacity and triggering inflation) of about 1.7 to 1.8 per cent. That implies that the excess capacity in the economy (commonly called the output gap) could widen this year – the kind of thing that might give the Bank of Canada cause to consider further interest-rate cuts, as closing the output gap is a key objective for the central bank. The Bank of Canada did recently discuss the notion of negative interest rates, in which it estimated that the effective bottom for its key rate might be more like minus 0.5 per cent – suggesting it has more room to cut the rate from the current 0.5 per cent than previously thought.
Beyond 2016, Ms. Caranci cautioned that structural impediments holding back the world's advanced economies – most notably aging demographics – will keep Canada and its developed-market peers on a historically slow growth trajectory. She likened those advanced economies to a car with a broken transmission, unable to shift above second gear.
"You could add more gas to the tank in terms of monetary and fiscal stimulus. … Ultimately you could keep the car running, but aren't going to get it to go any faster beyond the capability of that transmission."