Uncertainty around the current North American Free Trade Agreement (NAFTA) talks and the possibility of increased U.S. duties on exports will contribute to a significant slowdown in the Canadian economy this year, according to the latest forecast from the Conference Board of Canada.
While household spending will remain the main economic driver in Canada, the pace of spending will ease amid rising interest rates, high household debt levels and moderating employment growth, the board’s 2018 economic outlook for Canada says.
The forecast report notes that Gross Domestic Product (GDP) growth began to taper off late last year, and the trend is expected to continue, with 2018 growth pegged at 1.9%, down from 3% in 2017. Fears that NAFTA negotiations will fail to produce an agreement and that the Trump administration will impose tariffs on Canadian steel and aluminum are challenging businesses and exporters alike, reads the report.
Recent Conference Board research found that real GDP would lose half a percentage point of growth in the first year after the termination of NAFTA, but the impact could be larger if business confidence or foreign investment to Canada is undermined by the loss of free trade.
The trade uncertainty has also kept a lid on investment plans in Canada, with business investment spending forecast to expand by just 1% in 2018, down from growth of 2.3% in 2017, despite a more positive outlook for profits and sales.
And even with strong demand in the U.S. and a competitively low Canadian dollar, the forecast says Canadian exports will continue to underperform in 2018. For the third year in a row, non-energy merchandise exports are on track to record almost no growth, while exports in the wood products, aerospace and automotive sectors are all forecast to decline for the second year in a row, the Conference Board says.
It adds that tight labour markets and increased retirements from baby boomers will lead to much slower employment growth in 2018, with job gains to fall to 232,000 positions in 2018, down from 336,900 in 2017. Low unemployment, however, will help support wage growth, which the outlook says could help cushion the impact of rising interest rates.
