Canada: Canada Economy Profile
2015/09/07
Canada Economic Outlook
While the economy accelerated in the third quarter of 2014, the latest economic data indicate a deceleration in the last three months of the year and at the beginning of 2015. Economic activity recorded the steepest decline in nearly a year in November and the Ivey PMI pointed to a contraction in the manufacturing sector for the first time in seven months in January. More recently, U.S. President Barack Obama decided to block legislation that would have allowed the construction of the controversial Keystone XL pipeline designed to ship Canadian crude oil to American refineries. The project, which would have brought economic benefits to Canada, has faced heavy criticism from environmentalists and some U.S. Congress members.
Canada Economic Data
| 2009 | 2010 | 2011 | 2012 | 213 | |
|---|---|---|---|---|---|
| Population (million) | 33.6 | 34.0 | 34.3 | 34.7 | 35.1 |
| GDP per capita (USD) | 40,911 | 47,532 | 52,168 | 52,790 | 52,373 |
| GDP (USD bn) | 1,374 | 1,614 | 1,790 | 1,832 | 1,839 |
| Economic Growth (GDP, annual variation in %) | -2.7 | 3.4 | 3.0 | 1.9 | 2.0 |
| Domestic Demand (annual variation in %) | -1.9 | 5.0 | 2.5 | 2.5 | 1.5 |
| Consumption (annual variation in %) | 0.3 | 3.5 | 2.2 | 1.9 | 2.5 |
| Investment (annual variation in %) | -8.6 | 11.3 | 2.8 | 3.4 | 0.1 |
| Exports (G&S, annual variation in %) | -13.1 | 6.9 | 4.6 | 2.6 | 2.0 |
| Imports (G&S, annual variation in %) | -12.4 | 13.6 | 5.7 | 3.7 | 1.3 |
| Industrial Production (annual variation in %) | -11.0 | 6.0 | 3.9 | 0.9 | 1.9 |
| Retail Sales (annual variation in %) | -2.3 | 3.1 | 1.9 | 1.7 | 3.0 |
| Unemployment Rate | 8.3 | 8.0 | 7.4 | 7.3 | 7.1 |
| Fiscal Balance (% of GDP) | -2.7 | -2.1 | -1.3 | -1.0 | -0.9 |
| Public Debt (% of GDP) | 31.5 | 33.5 | 33.9 | 33.9 | 33.4 |
| Money (annual variation in %) | 9.3 | 5.5 | 6.5 | 5.5 | 6.9 |
| Inflation Rate (CPI, annual variation in %, eop) | 1.3 | 2.4 | 2.3 | 0.8 | 1.2 |
| Inflation Rate (CPI, annual variation in %) | 0.3 | 1.8 | 2.9 | 1.5 | 0.9 |
| Inflation (PPI, annual variation in %) | -3.5 | 1.5 | 6.9 | 1.1 | 0.4 |
| Policy Interest Rate (%) | 0.25 | 1.00 | 1.00 | 1.00 | 1.00 |
| Stock Market (annual variation in %) | 30.7 | 14.4 | -11.1 | 4.0 | 9.6 |
| Exchange Rate (vs USD) | 1.05 | 1.00 | 1.02 | 0.99 | 1.06 |
| Exchange Rate (vs USD, aop) | 1.14 | 1.03 | 0.99 | 1.00 | 1.03 |
| Current Account (% of GDP) | -2.9 | -3.5 | -2.7 | -3.4 | -3.2 |
| Current Account Balance (CAD bn) | -45.8 | -58.4 | -48.5 | -62.2 | -60.3 |
| Trade Balance (CAD billion) | -5.6 | -4.8 | 0.0 | -7.2 | -3.7 |
Looking forward, the decline in oil prices is expected to negatively impact government revenues and business investment. On the flip side, a weaker Canadian dollar coupled with increasing external demand from the United States should support economic growth. FocusEconomics Consensus Forecast panelists expect the economy to expand 2.2% in 2015, which is down 0.1 percentage points from last month’s forecast. For 2016, the panel also foresees economic growth of 2.2%.
Resilient fundamentals
Since the end of the recession, the Canadian economy has been additional resilient than most other developed economies, inclunding that of its major trading partner, the U.S. Over that period, Canadian GDP has grown at a healthy annualized rate of +2.7%, compared to the long term average of +2.4%, and compared the U.S.’s +2.5%. Insolvencies have been steadily falling since the mid-2000s and are expected to fall an extra -1% in 2015. Only 2 of 17 sectors are unfavourable, paper and textiles, both of which are struggling throughout the developed world. While the economy is relatively diverse, exports account for 30% of GDP, and 74% of those exports go to the U.S. Thus around 22% of the Canadian economy is exposed to the health of the U.S. economy, and 8% is exposed to the rest of the world economy which is currently anemic.
Falling oil prices a headwind
The recent drop in oil prices is imposing a significant drag on the economy. While the energy sector accounts for only 10% of Canadian GDP, the economy is sensitive to changes in the prices of oil (and other natural resources such as minerals and timber). The chart shows the high correlation between the price of West Texas Intermediate (WTI) crude oil and GDP. However, the relationship has myriad positive and negative effects. On the positive side, lower gasoline prices are benefitting the Canadian consumer, adding as much of +0.8% to GDP.
Oil prices have as well driven down the price of the Canadian dollar (CAD) sharply, attracting U.S. tourists who will add to consumption, while making non-petroleum exports additional competitive. The negatives are a bit stronger however, inclunding a sharp drop in petroleum exports, and effects localized to the oil patch inclunding a steep fall in capital spending, increased unemployment, a fall in housing values, and deteriorating provincial finances that rely on oil revenues. On net, EH expects that the drop in oil prices will exert a drag of -0.4% to -0.6% on 2015 GDP, bringing the estimate back below trend to +2.0%. Oil prices normally have a lagged result on the economy, so EH expects to see a continued drag from prices which started to collapse last summer.
Lowering rates, weaking CAD
The Bank of Canada (BoC) reacted to the drop in oil prices with a amaze rate cut in January, lowering the overnight rate from 1% to 0.75%, the initial move since an increase in September 2010. The BoC justified the move as an insurance policy on two fronts as a result of the fall in oil prices: initial to counter any threat to GDP increase, and second to counter any deflationary pressures. In fact headline consumer inflation fell to +1.0% in January, the bottom of the BoC’s target range.
The move towards monetary policy accommodation comes at a time at the same time as it is widely expected that the U.S. Fed will start raising interest rates in mid-2015. As such, the spread between real U.S. and Canadian 10 year interest rates has gone from +0.5% to +1.5% since July 2014, and it is expected that this spread will continue to widen. As shown in the chart, relatively higher U.S. interest rates have boosted the price of the USD against the CAD by +14% since July 2014. In this case, the weaker CAD will have the beneficial effects of increasing export competitiveness, helping close the trade gap, and importing inflationary pressures.
Country Rating AA1
Strengths
Politically stable
High per capita GDP
Strong banking system
Conservative monetary policy
Modest fiscal deficits
High data transparency
Strong manufacturing
Large oil and gas reserves
Diverse GDP
High per capita GDP
Strong banking system
Conservative monetary policy
Modest fiscal deficits
High data transparency
Strong manufacturing
Large oil and gas reserves
Diverse GDP
Weaknesses
Sensitive to commodity prices
Dependence on exports, particularly to the U.S.
High exposure to the U.S. economy
High personal debt
Elevated housing prices
Government revenues dependent on natural resource production
Deflationary pressures
Dependence on exports, particularly to the U.S.
High exposure to the U.S. economy
High personal debt
Elevated housing prices
Government revenues dependent on natural resource production
Deflationary pressures
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