Canada Country & Business Risk Report

Unfortunately, outside of those positives, there is little else that is helping the economy, and the outlook is not especially encouraging. Clearly the biggest risks, which are interrelated, are the global trade situation, and exposure to the U.S. economy. Approximately one-quarter of Canadian GDP is merchandise exports, and approximately three-quarters of that goes to the U.S., meaning that nearly 20% of Canadian economic output is dependent on exports to the U.S. With a U.S. recession possible, if not likely, in 2020, the Canadian economy is clearly at risk of a recession too. And net exports have in fact been the backbone of the economy over the past year, and without them the domestic economy has been barely growing at all at +0.3% y/y. If exports crumble, so will the economy. Uncertainty over global trade will also continue to weigh on the economy in at least two other ways. NAFTA 2.0 has yet to be ratified by Canada or the U.S., and there are substantial hurdles. Combined with the U.S.-China trade dispute, businesses have been reluctant to bet on the future, driving investment down -4.5% y/y, and until global trade recovers, investment will continue to drag on the economy. Furthermore, the manufacturing sector has been damaged by trade issues, with sales down -1.9% y/y, new orders down -4.4% y/y and the highest inventory to sales ratio since the recession. The most recent Ivey Purchasing Managers Index (PMI), which covers both the manufacturing and services sectors fell sharply into contraction in September to the lowest level in four and one-half years.

Potential to rebound

The Bank of Canada (BoC) has not been helping as it is one of the last major central banks to not lower rates, thus supporting the $C and putting a weight on exports. The BoC’s hand however is likely to be forced to cut rates at least once in 2019 and probably a total of three times before the end of 2020. Not only could this help support exports but it could get consumers out spending again. Consumer confidence is high and wages are growing rapidly, and a cut in interest rates could help lift the housing market and get consumers to loosen their purse strings. A further boost could come in the form of fiscal stimulus from a new government as there is little true impetus to cut spending. Finally, some leading indicators are projecting continued growth. The Canadian Federation of Independent Business (CFIB) Business Barometer Index is solidly in positive territory above 50 at 59.3, while the BoC’s Business Outlook survey rebounded in Q2, with the future sales component at the highest in two years.