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2016 economic outlook: Slow growth ahead

3-minute read

The Canadian economy is small and open to the rest of the world. That’s why turbulence abroad can have such a major impact on our economic fortunes.

For example, strong growth in the United States is currently giving a boost to our manufacturing sector. At the same time, low commodity prices are reducing investment significantly in the resource sector and limiting growth in some parts of the country. The result is a two‑headed economy that we expect to grow only modestly in 2016.

Soft demand crimps resource prices

Commodity prices are low due to weak world demand. The Chinese economy, in particular, is in transition and growing differently. The Chinese housing market is in a slump and authorities are less focused on building infrastructure, reducing the demand for many resources.

Moreover, the world supply of many commodities has increased significantly in recent years, stimulated by high prices.

The resulting glut has caused prices to fall. The natural resources sector, which drove growth in the Canadian economy following the 2008—09 recession, is now depressed. That will limit growth in Alberta, Saskatchewan, and Newfoundland and Labrador.

Oil price languishes

Of course, the continued weakness of oil prices is of special importance to our economy. World demand is increasing, but supply is increasing even faster, thanks to fracking and other new technologies. The price of oil should rise in 2016, but only slightly.

As a result, the oil industry is reducing its operating costs and limiting investment, which is having a strong impact on many sectors in Canada. Lower oil prices are also keeping the dollar low.

But some good news is coming from south of the border.

U.S. growth spurs manufacturing

The U.S. economy is still growing strongly and should continue to do well in 2016. Consumer spending is solid south of the border, stimulating the housing market and taking car sales to historic highs.

These developments are excellent for Canadian exporters. Higher demand from the U.S., combined with a low Canadian dollar, will continue to support our exports and our manufacturing sector across the country.

Provinces with a strong manufacturing base, such as British Columbia, Manitoba, Ontario and Quebec, will benefit most from U.S. growth and will be responsible for the lion’s share of Canada’s growth in 2016.

Saved by diversification

This year, we will see the importance of Canada’s diversified economy.

As world demand and supply continues to hold down our natural resources sector, exports to the U.S. will be there as a driver of economic growth.

The bottom line? Canada’s economy will see positive but modest growth in 2016.