2018 economic outlook: Global growth brings good news for Canadian entrepreneurs
Economies everywhere are having a banner year, and there’s more to come
Happy days are here again for the global economy, and that’s good news for Canadian entrepreneurs.
Canada had solid economic growth of 2.9% 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% on a nominal basis 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.
While growth of the Canadian economy will slow to about 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.
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 that 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. 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 is the right time for business owners to make the necessary investments to grow, be more productive and more competitive.
Oil market update
Oil prices should remain around US$50-55/barrel over the next few months. OPEC and Russia’s announcement to extend its supply cut to the end of 2018 will help to manage the anticipated oversupply of oil in the first part of 2018.
Oil prices have done well so far this year
Oil prices have had a good run recently. Both Brent and West Texas Intermediate blends are up about 10-15% year to date. As of the end of November, Brent is trading around US$63/barrel and WTI, at $58/barrel. The spread between the two blends continues to hover in the US$5/barrel range, in part due to greater relative supply of WTI compared to Brent.
Competing supplier interests
American producers are taking advantage of the higher prices raising their production to hit a record 9.6 million barrels per day at the end of November. This demonstrates the remarkable resilience and flexibility of U.S. production, especially following the recent hurricanes of Harvey and Nate earlier this autumn.
While U.S. production soars to new heights, OPEC producers and other oil producing nations, including Russia, are extending their supply cut of 1.8 million barrels/day until the end of 2018. The supply cut should keep oil prices north of US$50/barrel, though OPEC and the other countries need Brent crude oil prices closer to US$65/barrel according to IHS Markit, to break even on their government fiscal budgets.
Demand may slowdown
Part of the reason why prices are unlikely to remain at their recent highs is that higher prices mean slowing demand. The International Energy Agency in its November report suggests that higher prices, as well as warmer than normal weather, will weigh on demand. The Agency expects that supply will exceed demand in the current quarter as well as in the first quarter of 2018.
While prices have had a good run and the extension of the oil producing nations agreement is supportive, the increase in production, in particular from the U.S., and the potential slowdown in demand growth means that prices are more likely to hover around US$50-55/barrel over the coming few months than to continue rising.
Other economic indicators
Bank of Canada held its key interest rate at 1.00% at its December meeting
While the economy continues to grow, the pace has slowed down in the third quarter. The Bank of Canada held its key interest rate steady at 1.00% on December 6th. The Bank noted that growth moderated and remained above potential, as anticipated, and that core inflation is edging up as slack in the labour market is absorbed. The Bank anticipates growth of 3.1% in 2017, 2.1% in 2018 and 1.5% in 2019.
The Canadian dollar has been relatively stable over the past few months
The Canadian dollar closed at 78.52 cents U.S. at the end of November, up from 77.56 cents U.S. at the end of October. Canada’s strong economic growth propelled the loonie higher this year against the greenback. However, the U.S.’s strong growth and the expected rate hike by the U.S. Federal Reserve in December will put downward pressure on the loonie.
SME confidence improved in November
Canadian SME confidence, as shown by the Business Barometer index compiled by the Canadian Federation of Independent Business, rose modestly to 59.3 from 57.2 in October. Optimism improved in Ontario, Alberta, Prince Edward Island and Newfoundland, while it dipped a little in Quebec, British Columbia, Nova Scotia and Manitoba (though still in solid positive territory). Optimism though is low in New Brunswick and Saskatchewan. Natural resources, finance and real estate, and professional services are the most optimistic sectors. Over 50% of businesses expect to increase capital expenditures next year, either in office equipment, vehicles or buildings, and one-third plan to invest specifically in information and communication technology. Small and medium-sized enterprises are facing pressure on costs, in particular rising energy prices and technology costs. In addition, finding skilled labour remains a challenge, with over 40% of businesses reporting a shortage, which hinders their ability to increase sales and production.
Credit conditions remain stable
Credit conditions continue to remain favourable for businesses. The effective business rate is up 25 basis points since early July, which means that commercial banks have not passed on the full 50 basis points in rate hikes by the Bank of Canada.