Canada Economy Set to Slow Down

Much has been said about the importance of a trade deal with the US for the Canadian economy, as officials from both sides of the border continue to try to hash out a new agreement.

But, even if a new NAFTA deal is reached, it will not prevent the Canadian economy from slowing down from the robust growth it has seen recently, economists said, CBC reported.

Royce Mendes, senior economist at CIBC Capital Markets, forecasts that gross domestic product growth will fall to 1.8% next year and then drop to 1.3% growth in 2020.

“Our research finds that even with a NAFTA deal in place, the long-desired rotation in growth towards exports and business investment will be sluggish and won’t offset the coming slowdown in household spending and housing activity,” Mendes said in a note on Thursday.

Rising interest rates will hold consumers back from spending and make housing affordability even more costly, he said.

“As we’ve stated before though, that doesn’t mean higher interest rates will break consumers’ backs. With the unemployment rate expected to hover around 6% over the next couple of years, households, in general, should be able to service their debt loads,” Mendes said. “It will, however, leave fewer dollars for discretionary purchases.”

Added to that, Mendes said new headwinds, such as the US becoming more aggressive in imposing tariffs on Canadian exports with the current NAFTA deal still in place, represent a red flag for capital investment in Canada.

“Without healthy business investment, we also can’t expect exports to become an engine for economic growth,” Mendes said. “Last quarter’s export surge was nothing more than a flash in the pan, in part due to US buyers front running their own country’s tariffs.”