By Pierre Cléroux, Vice President, Research and Chief Economist
As an eventful year draws to a close, there’s some good news on the horizon. The Canadian economy is expected to pick up steam in 2017, pumping out real GDP growth of 2% for the year, according to the latest forecasts.
It will be a welcome relief from the sluggish growth Canada experienced over the last two years. For the first eight months of 2016, GDP expansion was 1.3%. That followed a 1.1% increase in 2015. For all of 2016, growth is forecast at 1.2%. These are hardly numbers to get excited about.
The lethargy of the last two years can be blamed on falling commodity prices and a resulting pullback in business investment. The chief culprit was the decline in the prices of crude oil, but the effect of crude’s pullback, along with that of other commodities, is fading. On the more positive side, while business investment kept contracting this year, it has done so less sharply.
Crude oil is making a comeback
One of the main drivers of growth for next year is that crude oil prices have firmed up. Although their future path is still uncertain, they appear to have reached a more balanced spot in relation to global supply and demand, and the probability of another collapse is slim.
Higher and more stable crude oil prices have boosted Canadian business confidence since the beginning of the year. This is confirmed by several indicators and suggests that business investment will pick up in 2017.
The crude oil slump weakened the Canadian dollar against its U.S. counterpart. The loonie has fallen by about 20% against the greenback since the middle of 2014—but it’s not all bad news. A cheaper loonie has been great for the tourist industry and many exporting manufacturers. It has also compensated for the decline in economic activity tied to natural resources. The adjustment in the Canadian economy is likely to continue into 2017, as the Canadian dollar should continue to favour exports.
Key interest rate rise is unlikely
Another reason for optimism: Canadian monetary and budget policies are expected to promote growth in 2017. Why? Because even if economic activity accelerates in the next 12 months, growth is unlikely to be strong enough for the Bank of Canada to feel obliged to substantially raise its key interest rate. A rate hike, while fending off inflation, would also have the negative effect of curbing demand.
Therefore, market interest rates will stay low and stimulate investment and consumption. Also in play are the infrastructure investments that the federal government announced at the beginning of 2016. They should make a greater contribution to economic growth in 2017.
The recovery in business investment, on which the expected acceleration in growth will largely depend, will probably be moderate, but positive.
BDC’s most recent study of small and medium-sized businesses shows that investing intentions are on the rise. Canadian entrepreneurs appear more optimistic about economic growth, and will invest more in 2017.