Economic Outlook: Canada’s Economy Chugging Along… just not at full steam

Canada’s economy has outperformed its G7 peers in many respects last year. It weathered the financial and economic crisis better than most industrialized countries and pulled off a fairly impressive turnaround. Measured against what you ask? Well, real GDP grew 4.9 per cent in the final quarter of 2009 and a resounding 5.6 per cent in the first quarter of 2010.  According to the Canadian Chamber of Commerce this was fueled by a strong rebound in consumer spending, residential in-vestment and government expenditures.

Not untypically, after the sharp bounce back, Canada’s economy lost some of its swagger, expanding at a sluggish 2.3 per cent annual rate in the second quarter of 2010 and a meager 1.0 per cent in the third quarter. Additionally, the pace of job creation slowed considerably in the second half of the year.

Recessions that are associated with financial crises or that are highly synchronized have historically been followed by weak recoveries. This one had both, creating a perfect storm.  In 2011, sluggish U.S. growth, the persistent strength in the Canadian dollar, faltering domestic demand and the questionable impact of prior fiscal and monetary stimulus—is likely to hold back GDP growth. Overall, Canada’s economy is projected to expand a modest 2.4 per cent (year-over-year) in 2011, following an estimated 2.9 per cent gain in 2010 according to Stats. Can.

What to watch for:

  • Higher household debt will typically slow consumer spending
  • Governments will real in spending in favour of stronger attacks on debt/deficits
  • Employment will mirror the economy with only 39% of firms surveyed (Bank of Canada Outlook Survey) intending to increase employment over the next 12 months
  • TD predicts job growth will be lower somewhere in the order of 5,000 to 15,000 per month
  • Unemployment is expected to be at around 7.8% in 2011 falling to 7.5% in 2012
  • Housing growth should at least stabilize with 190,000 starts in 2010 falling to 175,000 in 2011

What is fundamentally imperative for the economy to truly recover and restore fiscal discipline and start attacking debt is the transition away from a stimulus-led recovery to a private sector led one.

We have just experienced record trade deficits in Canada and with the US economy still sputtering and our loonie determined to hover around par with the US greenback, our export prospects seem no better in the near term. The bright spot in all of this according to the Bank of Canada’s Outlook Survey is our appetite for business investments.

  • 46% of Canadian firms will invest more in machinery and equipment while 44% will stay the same. That’s good news as it will doubtless contribute to improved productivity.

Finally, most experts are predicting that inflation will remain low through 2011 and interests rates the same. How much of all this comes with any sort of guarantee? You guessed it…..absolutely none of it.  Happy New Year!

Source: Statistics Canada; The Canadian Chamber of Commerce. f = forecast


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