2018 economic outlook: Global growth brings good news for Canadian entrepreneurs
Happy days are here again for the global economy, and that’s good news for Canadian entrepreneurs.
Canada had solid economic growth of 3.1% in 2017, having weathered the oil price shock of the past two years. Our economy is on a solid footing. The expansion has been broad-based, with all sectors of the economy contributing. Our goods exports are up 8.7% year over year. Business investment, which is absolutely critical to continued growth, has also improved. At the same time, Canada’s labour market has been thriving, adding 343,000 jobs year to date, with nearly all in full-time employment.
Canada should have a solid growth of 2.2% in 2018.
While growth of the Canadian economy will slow to about 2.2% in 2018, this is still decent growth. From a provincial perspective, Alberta, British Columbia, Saskatchewan and Ontario will be the engines of growth, with above 2% forecasted growth next year, while provinces in Atlantic Canada will show slower rates, at about one percent and lower.
Europe, the driver of global trade growth
As an open economy, Canada’s performance has been and will continue to be synchronised with the rest of the global economy. In step with stronger business and consumer confidence, global trade and investment growth have finally picked up from the recent lows. Global trade is expected to reach 3.6% this year—a big jump from 1.3% in 2016, and it is forecast to touch 3.2% in 2018, according to the World Trade Organization.
Europe has been the driver of global trade growth. In fact, the contribution of European imports to global trade growth equalled that of the U.S. and China combined. Europe’s economic growth is expected to reach 2.4% in 2017 and 2.1% in 2018, according to the International Monetary Fund. This is great news for Canadian exporters as they prepare to take advantage of the recently enacted Canada-European Union Comprehensive Economic Trade Agreement (CETA). CETA opens up a market of over 510 million people and that accounts for 22% of global GDP.
Now it’s the right time for business owners to make the necessary investments to be more productive and more competitive.
The other two most important global economies – the United States and China – have expanded this year as well. In the U.S., households have contributed the most, while in China the transition to consumer-led growth continues to evolve. The U.S. is expected to continue its expansion next year with 2.5% GDP growth. China’s economy will decelerate a little, growing 6.4% in 2018.
Higher interest rates on the horizon
A couple of uncertainties confront Canada in this rosy picture.
First, the U.S. Federal Reserve will likely raise its key policy interest rate three times in 2018, up to 2.25% by year-end, while the Bank of Canada may raise its policy rate only twice over the next 18 months, up to 1.5%. This differential means the Canadian dollar would likely lose some ground to the greenback. A falling loonie though is good for exporters to the U.S., and for the tourism industry in Canada.
But higher interest rates in the U.S. mean than borrowing globally will become more expensive, and this will have an impact on Canadian businesses. The anticipated rate hikes by the Bank of Canada will also contribute to higher borrowing costs.
NAFTA could sideswipe the loonie
The second concern is the NAFTA renegotiation. With about two-thirds of Canada’s goods and services exports destined to the U.S., this is a very important market for Canadian exporters. If the NAFTA renegotiation falls apart, though, tariffs would likely return to the rates under the rules of the World Trade Organization, which are not significantly different on average for the vast majority of our trade to the United States. But because of the rather lopsided relationship, that is, Canada depends on trade with the U.S. more than the other way around, the loonie could depreciate against the dollar, by as much as 5%. Of course, this would help compensate for the higher export prices.
Oil prices are expected to range between US $50 and $65 per barrel over the course of the year, and will likely stay within this band in 2018. Increased economic activity has been positive for oil prices. The oil supply reduction agreement by OPEC and other oil producing nations, notably Russia, has drawn down inventories and helped to stabilize prices. The agreement’s extension throughout 2018 will keep prices relatively stable next year. This will attract more investment to the sector, helping to spur growth in Western and Atlantic Canada.
What it means for entrepreneurs
The world economy is expanding and this offers incredible opportunities for Canadian entrepreneurs to position themselves for growth and take advantage of the global momentum. There are headwinds, but a lower dollar will continue to be advantageous for Canadian exporters. With interest rates still low, now it’s the right time for business owners to make the necessary investments to grow, be more productive and more competitive.