Canadian household finances | Economist says spending is being stifled because consumers are carrying high debt loads
The Canadian dollar is expected to weaken over the next year, and oil prices could settle around $85 a barrel. However, commodity prices are likely to remain strong.
Much of Canada’s fortunes and continuing stability depend on what happens in the United States, where growth is approaching 3.3 percent, says the assistant chief economist for RBC Canada.
“A lot is riding on this recovery in the U.S., and that applies to Canada as well,” Paul Ferley told the recent Canfax forum in Calgary.
“We are very much counting on that strengthening in the U.S. to help pick up growth in Canada and allow global growth to strengthen.”
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There were concerns within financial markets earlier this fall about whether the U.S. economy would rebound and if the European Union might fall back into recession.
However, growth is expected to remain strong in the U.S., which is good news for Canada. Growth is at 2.3 percent and should increase to 2.7 percent next year.
At the same time, the Bank of Canada is in no rush to raise interest rates. It is expected to maintain the overnight rate at one percent until the second quarter of next year before rising gradually to 1.75 percent.
Inflation is around two percent.
Oil prices have fallen slightly for western Canadian select and west Texas intermediate crude.
Natural gas is sold mostly in North America, and market prices are stable. The market is not likely to expand unless more liquid natural gas is available for export.
The Canadian dollar, which was at par with the U.S. currency in 2012, is slipping and could settle at 85 cents next year.
“The strength in the U.S. economy, along with the recent depreciation of the Canadian dollar, will provide greater support for exports,” Ferley said.
Exports provide room for the Canadian economy to grow.
Exports usually run close to U.S. growth, but Canada under-performed in 2012 when exports stalled. This was partly because the dollar was close to parity, which made it difficult for exporters to sell into the U.S. Commodity prices were also historically high.
Exports are expected to recover by the end of the year and continue well into 2015, supported by growing demand for resource based products and agricultural goods, particularly from China, India and Mexico. That should help keep all commodity prices historically high.
More people are working, but business investment has been a disappointment for the last two years.
“We thought we might see more strength,” he said.
“Given that balance sheets looked fairly healthy, we thought they had enough scope to increase spending.”
Businesses are not likely to start committing funds until they are sure of a sustained recovery in the U.S.
Consumer spending is stalled because too many Canadian households are carrying too much debt.
“It makes upside potential for growth coming from consumers a bit more limited,” Ferley said.
Spending may increase if interest rates on loans come down because debt servicing would be easier.
The housing market is also slowing, and affordability is a challenge.
The RBC housing affordability measure reflects interest rates, mortgage payments and incomes. Based on that measure, he predicts sustained poor affordability for an extended period of time.
Government spending is expected to remain flat.
The federal government is moving toward a surplus, so fiscal policy might ease, including tax cuts.
Quebec and Ontario still face deficit challenges, which means they must remain in a restrictive mode.
As for growth in the coming year, Alberta will lead the country, followed by Saskatchewan.
Ontario, British Columbia and Manitoba are in the middle while Quebec and the Atlantic provinces are further behind.
Prince Edward Island is expected to be the poorest performer.
