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By Aubrey Basdeo
Special to the Financial Independence Hub
Coming off a tumultuous 2015, Canadians are ready for some good news in 2016. When it comes to the economy, however, they might have to wait a while longer.
This is not to say we foresee uniform doom and gloom. One bright spot remains the U.S. economy, which was given a vote of confidence last month when the Federal Reserve raised its target interest rate. If the U.S. expansion is as robust as the Fed thinks it is, that should bode well for the Canadian economy and exporters, which rely heavily on the American market.
On a broader level, the Fed liftoff was also a signal that monetary policy, which has dominated the macroeconomic landscape for years now, will be less important going forward. The days of easy money may have begun to draw (slowly) to a close, and as they recede we’ll have a clearer picture of other factors – like the business cycle and asset valuations – which have been masked by accommodative monetary policies for nearly a decade.
But we might not like what we see. Growth globally is poised to be slow in 2016. Canada’s prospects will be tied to this low-flying trajectory, in large part because there are so few potential growth drivers in the domestic economy.
5 reasons for only modest growth in 2016
Here are five reasons we’re seeing only modest GDP growth (1.5 per cent) for Canada in 2016:
- Oil Shock, Round 2: We’re expecting capital expenditures in the energy sector to decline by another 20 percent this year. That’s on top of a 40 per cent drop in 2015. Last year’s cuts hit oil-producing provinces hard; this year, they could eat into jobs and consumer confidence across the country.
- Manufacturing disappointment: With low interest rates and a plunging loonie, policymakers have been looking to Canada’s manufacturers to pick up the slack created by the swoon in commodities. That hasn’t happened, and even with a sharply depreciated dollar since and firming U.S. demand, the factory sector’s rebound has disappointed. With U.S. growth steady but low (at 2.5 per cent), and export competition from China and Mexico high, that looks unlikely to change anytime soon.
- Vulnerable consumers: Adding to the potential second-round effects of the oil shock on consumer confidence and jobs, mortgage rates are poised to drift upwards this year, undermining the wealth effect of ever-rising home prices. Household debt is also high, and with rising real rates, might get higher – making the consumer an unlikely candidate to shoulder the burden of economic growth.
- Stimulus a pinprick, not a jolt: The federal government has pledged to spend billions on infrastructure, but the timing and magnitude are unclear. We expect fiscal stimulus to provide a marginal impact on growth in 2016, at best.
- Central bank hold: The economy will grow, however sluggishly, and we expect the Bank of Canada to set a high bar, primarily to avoid intensifying current imbalances such as household debt, for any more interest rate cuts. That won’t stop the Canadian dollar’s decline, however.
Put it all together, and it looks like more of the same for the economy in 2016. Some supporting tailwinds will push us forward, but the pace will be slow, and the course will be uncertain.
Aubrey Basdeo is a Managing Director and Head of Canadian Fixed Income for BlackRock. He is a regular contributor to The BlackRock Blog and you can find more of his posts here.
