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Monthly Economic Letter

December 2019
Feature article

Why Canada’s ageing population should matter to you

This month’s economic letter looks at how Canada’s ageing population is changing our economy and how your business can benefit.

Canada is getting older. What does that mean in tangible terms? In the 1970s, there were eight Canadians of working age for each person older than 65. That number is now closer to four and is expected to fall to two by 2050. Ultimately, this means there will be fewer workers (in proportion to retirees) to drive economic activity and fund social programs.

Declining fertility rates and longer life expectancies explain Canada’s ageing demographics. Although immigration is helping to abate the impact of a low birth rate, growth in Canada’s workforce is expected to be much lower than in the previous decade at 0.5%.

The graph shows past and expected growth rates in Canada’s workforce. Note that low growth isn’t going to get better for a while.

What does an aging population mean for your business?

Labour Shortages: Is your company having trouble finding qualified employees? If yes, the situation is unlikely to get better any time soon because of our ageing population. The impact of labour shortages shouldn’t be underestimated. Research has shown that hard hit companies are more likely to experience lower growth, be less competitive and suffer a deterioration of the quality of their products and services.

BDC has a series of free and downloadable reports available on its website to help entrepreneurs deal with labour shortages. These reports provide tangible advice on how your business can automate production to overcome staffing issues; develop an employee value proposition to become a more attractive employer; and tap into under-utilized segments of the labour market, such as immigrants and Indigenous workers. You can download these studies here and here.

Consumption patterns: Some sectors will do better than others. Obvious winners include industries like health care, pharmaceuticals and home care that are needed to care for an ageing population. Travel and leisure businesses that offer “bucket list” type of experiences are also expected to do well.

Elsewhere, post-secondary institutions are also capitalizing on the trend by developing courses geared towards older adults. Referred to as the “University of the Third Age” (U3A), institutions are offering courses on such subjects as languages, philosophy, history and music that are specifically adapted to older adults.

Other sectors are likely to face more headwind. Research shows that older adults tend to buy higher quality goods and keep them longer. This will have an impact on consumption patterns and sales cycles in consumer products (think cars and appliances) and could represent an opportunity for manufacturers and retailers of higher-end, longer life brands.

Housing markets: Intuitively, you might think an ageing population would mean reduced demand for new housing. However, researchers at the Bank for International Settlement (BIS) argue that a shift towards an older population will actually increase demand for new homes.

The BIS argues that in wealthier countries, like Canada, the elderly will stay in their homes, given they generally own them outright and the stress associated with moving. This will tie up existing homes and new construction will be needed to satisfy demand from new buyers. Assuming the BIS is correct, the housing and construction sectors will benefit (at least in the short and medium term) from an older population.

Impact on government spending: An ageing population will put upward pressure on government spending, notably for health care and pension costs. The graph, which plots the growth in health spending versus Canada’s GDP, shows that increases in health spending have outstripped economic growth since the early 2000s.

Furthermore, growth in the labour force is an important contributor to overall economic growth. Specifically, more people working translates into higher household income and spending. Conversely, an ageing population and shrinking labour force are likely to stifle growth. Slower GDP growth will have an impact on government tax receipts, adding to the burden from higher old-age related spending.

Governments are trying to mitigate the impact of the ageing population by encouraging greater workforce participation, increasing immigration levels and improving productivity through investments in machinery and enhanced worker skills.

If these solutions don’t suffice, governments will need to resort to heavier-handed solutions like raising taxes and the age at which you can collect government pensions. The funding burden will likely increase for consumers and businesses as someone will need to offset age-related government program expenses and fill the gap from lower income tax receipts.

Bottom line

The ageing of our population represents risks but also opportunities for small and medium-sized businesses. You should act now to position your business to respond to current demographic trends and maintain your growth.

*As a side note, an ageing society is not necessarily all bad. This article from the Harvard Business Review does a good job explaining why age is only one factor affecting economic performance.

Canadian economy at a glance

Canada 2020: The economy will perform better

After a slow start to 2019, the Canadian economy has improved in recent months and growth for the full year is now expected to come in at 1.5%. That should set the stage for more positive news in 2020 with growth reaching 1.7%, close to the economy’s full potential.

This relatively positive outlook stems from improvement in a pair of areas that limited the economy’s growth in 2019. First, the housing market is rebounding and will have a positive impact in 2020. Second, business investment should be better. Together, these factors will contribute to more balanced growth in 2020.

Consumers will continue to drive growth in 2020

Canadians continue to benefit from a strong job market. The economy has created 293,000 jobs in the last 12 months and the unemployment rate is now 5.9%, one of the lowest rates in the last 40 years.

A tight job market in many regions of the country is putting upward pressure on salaries. As a result, household disposable income is increasing, which is helping to boost consumer spending.

Higher household income and lower mortgage rates are also supporting a firmer real estate market and, after a year of cooling, the housing sector will be stronger in 2020, providing more support for growth.

A healthier world economy will sustain Canadian exports

While geopolitical uncertainty has been a brake on the Canadian economy in 2019, we believe the global economy will accelerate in 2020, helping Canadian exports.

We see two reasons for this optimism. First, 21 central banks turned more accommodative in 2019, which will stimulate growth. Second, we expect a trade deal to be concluded between the U.S. and China, lifting tariffs on US$1 billion of trade.

U.S. President Donald Trump is going into an election year in 2020 and needs a healthy economy. That gives him an important incentive to make a deal with China. On the other side of the negotiating table, China also has a strong interest in coming to an agreement—U.S. tariffs are slowing down its economic growth significantly.

Business investment is improving

Lower oil prices and global uncertainty have made business investment volatile over the last two years, especially at the beginning of 2019.

However, investment improved in the third quarter, signaling the beginning of a turnaround. With strong demand abroad, Canadian exporters will continue to invest to increase their capacity. We also expect economic uncertainty to come down a notch, which should help investment.

Economic growth in Canada will be more balanced in 2020

The good news is that growth will not only be stronger but also more balanced in 2020. Consumers, businesses, governments and exporters should all make positive contributions, bringing growth close to the economy’s full potential.

What does it mean for entrepreneurs?

  1. The housing market will perform better in 2020, providing impetus to the construction industry. Lumber manufacturers and building supplies wholesalers should benefit as well.
  2. As the global economy improves, demand for Canadian products and services will increase in 2020.
  3. Labour shortages will remain an important challenge in many regions in Canada.
U.S. economy at a glance

U.S. 2020: No recession in sight

Despite all the uncertainty created by trade tensions, the U.S. economy has been very resilient in 2019.

Economic news out of the U.S. has been dominated by tariffs imposed by the Trump administration on $500 billion of Chinese imports as well as on steel and aluminum from Canada (lifted in May), and now from Brazil and Argentina.

Nevertheless, the U.S. economy is expected to grow 2.2% in 2019, thanks to consumers who have been the real engine of economic growth. We believe that the U.S. economy is on track for another year of solid growth in 2020, especially with the prospect of some of the trade tension dissipating.

There are three reasons to believe that the U.S. economy will perform well in 2020.

1. A deal with China

The trade dispute with China has created a high level of uncertainty. Many American businesses are facing tariffs on goods they import from China, which is hitting their bottom line.

We believe the U.S. will sign a deal with China for two reasons. First, Trump needs a strong economy as he tries to win re-election in November. Second, U.S. tariffs are hurting the Chinese economy, so that country also has also a significant incentive to sign a deal.

An agreement will probably not be the end of tensions between the world’s two largest economies, but it will eliminate tariffs and lift much of the uncertainty. A deal will also encourage business investment, which will probably grow again in 2020.

2. Lower interest rates

The Federal Reserve has reduced interest rates three times since last summer to 1.75%. These reductions seem already to have had a positive impact on the housing market. It will gain momentum in 2020, stimulated by lower rates and a solid job market. Moreover, the inventory of homes for sale and the homeowner vacancy rates are low, setting the stage for an increase in housing starts.

3. Consumers will continue to drive growth in 2020

The job market continues to perform very well. The unemployment rate is 3.5%, one of the lowest in 50 years. The economy continues to create jobs at a solid pace—an average of 180,000 jobs have been created every month in 2019. And long-term unemployed people are heading back to the job market, which is a very good news for many Americans.

Low unemployment is pushing salaries higher and increasing consumer confidence. As a result, Americans are spending more in stores and online and buying more houses. The performance of the job market will continue in 2020 and consumers will remain the main driver of economic growth.

The economy will grow in 2020

Reinforced by a new agreement with China, the U.S. economy will perform well in 2020. There is no imbalance in the economy that could trigger a recession. Consumer debt is low and there is no housing bubble. The stock market is elevated but not unreasonably so, considering business performance and debt levels.

Government debt is definitely high, but the largest economy in the world can sustain high deficits. Therefore, we see no reason to believe the economy will fall into a recession. On the contrary, we expect solid growth for 2020.

What does it mean for entrepreneurs?

  1. U.S. demand for Canadian exports will remain strong and continues to provide opportunities for Canadian exporters.
  2. The Canadian dollar should remain at a relatively low value against the greenback providing exporters with an added advantage.
  3. Interest rates in the U.S. will remain low over the next few months, meaning low borrowing costs.
Oil market update

Is the worst over for oil markets?

Driven by supply dynamics, trade tension and recession fears, oil prices have been highly volatile over the last two years. As we enter 2020, markets may be ready to stabilize thanks to stronger global growth and steadier supply dynamics.

The International Monetary Fund expects world economic growth to increase to 3.4% in 2020 from 3.0% this year. The stronger growth outlook is based on the easing of credit conditions by several central banks and on the potential for a trade deal between the U.S. and China that would spur global trade and manufacturing. This will ultimately support higher oil consumption.

Oil demand should grow by 1.2 million barrels per day (mb/d) in 2020 and be accompanied by higher refinery activity.

Supply management will continue in 2020

OPEC and allies met earlier this month in Vienna to discuss the future of the latest agreement. The OPEC+ ministers decided to increase their production cuts by another 500,000 barrels per day, bringing the total production cuts to 1.7 mb/d starting January 2020. This decision comes after the International Energy Agency forecast an increase of 2.3 mb/d from non-OPEC countries, including the U.S., which is forecast to continue increasing its output to an annual average of 13.2 mb/d.

Meanwhile, Alberta oil curtailments have been extended until December 2020. However, production will be allowed to increase moderately each month. While transportation remains a major headache for the sector, Enbridge’s Line 3 came online earlier this month and should bring some relief to producers in the coming year. Waivers to curtailments are also possible if output is shipped by rail.

A more stable global pricing picture will be welcomed by producers after high volatility in 2018 and 2019. At the end of 2018, oil prices fell sharply as supply increased faster than demand. It took some time for the market to readjust into balance, and prices to recover.

One of the reasons the market was oversupplied was that the U.S. provided more sanction waivers on Iran than the market had anticipated. The U.S. later changed course, putting an end to the waivers while announcing new sanctions on another major producer, Venezuela, shortly after.

Meanwhile, OPEC and its allies agreed to cut production by 1.2 million b/d, last December and later agreed to extend the cuts until March 2020. OPEC’s compliance with the cuts has been good, but non-OPEC adherence has been rockier. In October, Russia did not comply with the supply agreement for the third consecutive month, putting more burden on Saudi Arabia to hold the line.

Over the longer term, the greatest contributor to robust global supply has been U.S. production. It has increased steadily for years, thanks to the shale revolution, reaching a record 12.8 mb/d in November. For many years the biggest oil importer in the world, the U.S. became a net exporter of oil this fall. Talk about a disruption for the oil market!

In Canada, the benchmark price, Western Canadian Select (WSC), was also hit by high volatility this year. High production and limited transportation capacity resulted in inventory build-ups and pushed WCS down.

The differential between WCS and West Texas Intermediate reached almost $50 per barrel early in the year, prompting the Alberta government to impose production curtailments of 325,000 barrels per day to reduce a storage glut. The effect on WCS was immediate and the gap narrowed to its historical average for the most of the year.

Bottom line

The Vienna agreement, along with more stability in U.S. production and improvement in the global economy, should support a more balance market this year, although, prices are likely to stay relatively low.

The actions taken by the Alberta government and increase capacity from Enbridge Line 3 should keep the Canadian discount near its historic average in 2020.

Other economic indicators

Bank of Canada closed the year as it started it

The Bank of Canada held the overnight interest rate at 1.75% on December 4. In its statement, the Bank noted the Canadian economy was expanding as anticipated and that the global economy was stabilizing. Rates are likely to stay steady through 2020, given the Bank’s outlook. That said, the Bank of Canada’s latest statement was less dovish than previous ones, re-iterating that the major risk to the economy is international trade.

The loonie has been stable and will likely stay that way in 2020

The Canadian dollar has been stable for a year now, oscillating around US$0.75 since November 2018. A low loonie comes as a boon for Canadian exporters who have been suffering from uncertainty surrounding trade tensions for a while. More stability in global markets for 2020 should help the dollar remain generally stable, although the modest slowdown of the U.S. economy could push the loonie to appreciate slightly against the greenback.

Small business confidence took a hit

The confidence of Canada's small and medium-sized business (SME) owners dropped significantly in November. The Canadian Federation of Independent Business (CFIB) Business Barometer Index lost almost four points and stood at 56.1. The level of optimism among SMEs has deteriorated in most provinces. The Prairies were again the most pessimistic of all, with index values for Alberta and Saskatchewan falling under the 50 point threshold. Other indicators from the CFIB’s survey are also pointing to a general discomfort among Canadian business owners. The proportion of firms that expect weaker growth in the next 12 months has been rising. The share of firms that describe the general situation of their business as “bad” has also increased.

Credit conditions are stable

Effective interest rates for businesses and individuals are currently about 3.5% and 3.7% respectively. Although interest rates declined slightly recently, they mostly reflect changes in the Bank of Canada’s policy rate which has been stable for a while. Given that the Bank of Canada anticipates a better outlook for the economy in 2020 than in 2019, we expect it to keep its key interest rate at 1.75%. The effective interest rate should also remain stable and credit conditions will likely stay accommodative in 2020.

Key indicators—Canada

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