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Threat of trade war to shock Canadian economy

Threat of trade war to shock Canadian economy

OTTAWA – The Conference Board of Canada’s latest Canadian Outlook Bulletin calls for the national economy to grow by 1.8 percent in 2018–19 in the wake of a 3 percent gain last year.

“An easing pace of consumer spending, potential breakup of NAFTA and daily threats of new tariffs across a wide range of goods, including in the automotive sector, will weigh on Canada’s economic growth prospects,” said Matthew Stewart, Director, National Forecast.

Highlights
  • The Canadian economy is forecast to grow by 1.8 percent in 2018–19.
  • Export growth will be limited to a modest 1.4 percent this year, weighed down by recently enacted tariffs on softwood lumber, steel, and aluminum.
  • While stronger wages will help sustain consumer spending, high debt levels, rising interest rates, easing home prices, and higher inflation will result in a slower rate of increase.

Canada’s export sector will remain on shaky ground over the near term as rising protectionist measures from the United States and continued uncertainty surrounding the outcome of the NAFTA renegotiations dominate and undermine the sector’s outlook. This is particularly true for the heavily challenged non-energy sector, which has already witnessed several industries being subjected to tariffs in recent months.

Meanwhile, the prospects of a NAFTA dissolution remain high. A collapse in the 24-year-old trade agreement represents a major downside risk to the Canadian economy. The Conference Board expects that the demise of NAFTA would subtract about 0.5 percent from our growth projections but this is under an assumption that tariffs remain low, in line with World Trade Organization rules. Canada could be hit much harder given recent threats and tariffs already applied on a wide range of imports by the United States. Overall, export volumes are forecast to increase by a modest 1.4 percent this year.

This year and next, consumer spending growth will ease as households reduce the pace of borrowing in the face of higher interest rates and slower job growth. Lower home prices will also impact spending, as households will have less equity built in their homes with which to borrow against. On a brighter note for households, the unemployment rate remains at a record low and job vacancy rates continue to edge up, translating into strong wage growth. Average weekly wages are expected to rise by 3.3 percent in 2018, double last year’s pace.

On a more positive note, Canadian companies made substantial increases to plant and equipment investment in the first quarter of 2018. The increase in business investment was long overdue and will help ease record high capacity utilization across many sectors of the Canadian economy. Current demand and capacity conditions would typically result in strong growth in business investment but many firms are reluctant to ramp up spending due to concerns about the future of NAFTA, access to the U.S. market and the prospects of a global trade war.

Matthew Stewart will provide more details on the economic implications of U.S. tariffs on Canada’s economy during a live webinar on July 17, 2018, at 11:00 AM EDT.

The Canadian Outlook Bulletin: Summer 2018 provides highlights of the Conference Board of Canada’s short-term national outlook and is available from our e-Library.

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A copy of the report is provided for reporting purposes only. Please do not redistribute it or post it online in any form.

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SOURCE Conference Board of Canada

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