Stage Set for Canada’s Economy to Strengthen in 2017

Business executives more optimistic, particularly for energy sector
December 21, 2016 Updated: December 21, 2016

The groundwork has been laid for a stronger Canadian economy in 2017—stable oil prices, infrastructure spending, an improving U.S. economy with potential upside from fiscal policy, and still very low interest rates.

Finally, a light can be seen at the end of the tunnel for the energy sector.

With the drop in energy prices in late 2014, oil companies reeled in investment spending. Alberta has lost about 140,000 jobs since December 2014.

Now, with the price of West Texas Intermediate hovering around US$50 a barrel, boosted by OPEC’s deal to cut supply, most economists expect business investment to pick up.

RBC expects fiscal spending and business investment to take the baton from the housing market as economic engines in 2017.

In its Dec. 7 statement, the Bank of Canada said, “The effects of federal infrastructure spending are not yet evident in the GDP [gross domestic product] data.” The measures and expenditures take time to work through the system, unlike the Canada Child Benefit. RBC estimates an increase of 0.4 percent in GDP due to infrastructure spending through 2017.

Most Canadian business executives believe the price of crude will be higher by the end of 2017. The Gandalf Group‘s Quarterly C-Suite Survey of 155 executives from the largest Canadian companies, released Dec. 12, revealed that 69 percent think the Trump administration will be supportive of the Canadian oil and gas sector; however, only 13 percent have already adjusted their business plans in response to the upcoming change in administration.

It could take more time for some projects to become profitable by lowering costs and gaining efficiencies even with stable oil prices, said ATB Financial Chief Economist Todd Hirsch in an interview with BNN. He cautioned, “We don’t see the oilsands as an enormous driver of future investments in the province [of Alberta], at least not in 2017.”

69 percent think the Trump administration will be supportive of the Canadian oil and gas sector.
— Gandalf Group Quarterly C-Suite Survey

RBC Deputy Chief Economist Dawn Desjardins thinks Alberta’s growth will be the “swing” in terms of the country’s economic performance. This rebound would be coming after a contraction of close to 7 percent over 2015 and 2016, according to ATB Financial.

However, Hirsch thinks unemployment will remain elevated at 9 percent in Alberta during the first half of 2017, making the environment still feel recessionary.

RBC forecasts Alberta’s economy to grow 2.2 percent—similar to ATB Financial’s forecast of 2.1 percent—which would put it among the best-performing provincial economies.

Other Factors

Job growth and wage gains have come slower in Canada in comparison with the United States in the last few years. The issue of more part-time jobs being created is predominantly a supply-side issue rather than a demand one, says Desjardins. RBC’s analysis of November’s jobs data showed that many of the part-time jobs created were due to people choosing not to work full time.

“It’s not a particularly worrying phenomenon in so much as it’s not a business conditions reason for the change in that job growth,” Desjardins said.

While she expects job creation to grow, she said it’s hard to determine if the ongoing split between part-time and full-time jobs will continue. “It could be the inflection point that people almost want to work more part time, or we could see that reverse as we go through the next year,” Desjardins said.

In fact, 2017 looks like an inflection year for the housing market. Home sales rose 4.4 percent in 2016 with average house prices rising 9.5 percent, but RBC forecasts an 11.5 percent decline in home resales and prices falling 1.6 percent in 2017.

The Bank of Canada just reiterated its warning about housing market vulnerabilities—highly indebted homeowners and prices that have risen too much too fast. Housing market activity in Vancouver has been slowing for several months and stricter mortgage-qualifying criteria will make homes less affordable. The benefit is a gradual improvement in the credit quality of homeowners.

Overall, business executives are more optimistic post the U.S. election, with 72 percent expecting growth in the Canadian economy—a slight improvement over the 65 percent from the third quarter.

But the C-suite’s biggest worry is what the Trump administration might do to free-trade agreements and tariffs on Canadian exports. Preserving free trade, tariff levels, and market access is the top issue for the Canadian government to prioritize in its relations with the Trump administration as far as business leaders are concerned.

A couple of recent forecasts for 2017 Canadian economic growth include RBC at 1.8 percent (from 1.3 percent in 2016) and BMO at 2.0 percent.

Follow Rahul on Twitter @RV_ETBiz

Follow Rahul on Twitter: @RV_ETBiz