The Canadian economy was resilient in 2016 despite still low oil prices, and the Alberta wildfires which were the costliest natural disaster in Canadian history. The fires caused Q2 GDP to fall -1.2% q/q annualized and drove the full year rate down to only +1.4%, masking the strength the rest of the year which provided numerous upside surprises. The factors which created those upside surprises will also lay a foundation for continued strength in 2017, which we expect to grow +2.1%.
The services sector has been very stable throughout the recovery and will provide a basis for continued growth in 2017. The energy sector, which finished the year growing +5.5% y/y might have hit bottom as the majority of bankruptcies and consolidations may have worked their way through the system. Commodity prices are rebounding, typically a strong sign for Canada. Leading indicators from the Bank of Canada (BoC) Business Outlook Survey and the CFIB Business Barometer point to strength through the year.
On the manufacturing side, leading indicators are also robust with new orders up +6.8% y/y in December and the inventory/sales ratio down at the lowest level in six years. The employment situation is encouraging as job growth is actually accelerating from only +0.4% y/y in July ‘16 to +1.6% y/y in February ’17. At the same time, the unemployment rate is historically low at 6.9% vs a long-term average of 7.7%, while the participation rate remains near average at 65.8%, all of which will promote robust consumer spending which grew +2.2% in 2016. Fiscal policy remains stimulative.
Monetary policy is very accommodative and will remain so through 2017 as the BoC faces stubbornly low inflation. In turn, a loose BoC and a tightening Fed will also keep the CAD weak vs. the USD, making Canadian exports more competitive. Exports will also benefit from a stronger US economy in 2017 which will stimulate demand for Canadian goods. Clearly the outlook for 2017 is brighter, and as a result we expect bankruptcies to continue to creep down, falling -1% through the year.