World Economy

Canada Growth Unmatched in G7

Exports and business investment remain an important part of  the normalization.Exports and business investment remain an important part of  the normalization.

Almost out of nowhere, Canada has become one of the fastest growing economies in the developed world. The oil-producing nation, which struggled mightily with falling crude prices the past two years, grew at an annualized pace of almost 4% in the first quarter, according to the Bank of Canada’s latest estimates. No other Group of Seven economy even came close.

For all 2017, the central bank is projecting 2.6% growth—which would put the economy at the top of the rich-country growth scale, Yahoo Finance reported.

Yet even with the economy suddenly running hot, caution prevails. The Canadian dollar has had a middling performance despite the strong economic numbers.

At a rate decision last week in Ottawa, Canada’s central bank revised up growth projections for 2017, but cut them for 2018. It also raised questions about the sustainability of the rebound and the country’s long-term growth outlook.

The Bank of Canada “welcomes the recent strength in economic data and wants to see more of it in order to be more confident that growth is on a solid footing,” Senior Deputy Governor Carolyn Wilkins told reporters Wednesday.

 Growth Will Revert

Policymakers provided three reasons for why they believe growth will revert to a slower pace:

- The energy sector is stabilizing, which removes a major drag on GDP. But that doesn’t mean it will be a source of growth any time soon.

- An increase in government transfers is boosting household spending, but here too the impacts on growth will level off.

- Housing activity in the greater Toronto region, which has been on a tear, will slow.

And they added another worry. Whatever growth there is just doesn’t feel right given the weakness of exports and investment.

Governor Stephen Poloz has often outlined what he thinks the economy will look like when things return to normal—a self-generating expansion not fueled by policy. Trade and business investment are crucial to that story.

But those two components have rarely been weaker. The central bank for example sees business investment declining for a third straight year in 2017—only the second time in records dating back to the 1950s that’s ever happened and the first time outside of a recession.

Exports and business investment remain an important part of the normalization narrative for the central bank, despite their recent poor performance.

By 2019, those two segments will contribute 1.3 percentage points to a forecast 1.8% growth rate that year, according to the bank’s new forecasts. Without that, there will be nothing to offset an expected slowdown in household spending, residential investment and government stimulus.

In fact, what may explain policymakers’ caution is that they’re much more sure of the latter. Household consumption as a share of the economy has been hovering at the highest since possibly as far back as the 1960s. Debt levels are at records and Poloz believes Toronto’s housing market is due for a correction .

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