Consumers are paying down debt rather than spending, businesses leaders remain nervous and governments across Canada are unlikely to invest in further economic stimulus unless something major threatens our recovery. TD Economics’ latest quarterly outlook for the Canadian economy is a mixed bag at best. Next year will be better, we mean it this time.
The report makes a number of predictions about Canada and global factors that could impact our economy:
- The economy will grow, but not dramatically. Real gross domestic product (GDP) growth will be 1% this quarter, 1.8% in Q4 and plus-2% throughout 2013. Diana Petramala, an economist with the bank, told me that what’s holding us back has less to do with the 2008 financial crisis than it does with other, more systemic factors. “The first is poor productivity performance,” she said. “The second is our aging population. The labour force isn’t growing as fast as it has in the past … We’re pretty much growing right at our potential growth rate.”
- Federal and provincial governments will spend less, and may even raise taxes. Despite Prime Minister Stephen Harper’s comments last week, we shouldn’t count on further government stimulus. This will have a negative effect on economic growth. Petramala told me that if the domestic economy went into a sustained downturn, then of course this wouldn’t be the case. “But we think that the economic environment will start to improve in 2013 and government will have the capacity to remain on-track and get their budgets balanced,” she said.
- Consumer spending will be relatively soft. Relative to income levels though, consumer and household debt will remain high. “Incomes aren’t growing as fast as they have in the past,” said Petramala. Still, a lot of consumers have gotten the message about debt. “In the last quarter, we saw the savings rate rise from 3.1% to 3.6%. So it’s not that they can’t go out and spend, it’s that they’re choosing to focus more on restraint.”
- The Canadian housing market is 10% over-valued on average, and prices will come down accordingly. We’re not looking at a crash. Prices are expected to come down over a two- to three-year period. Vancouver and Toronto are over-valued by something more like 15%.
- Business spending, particularly among exporters, will start to pick up next year. There’s still uncertainty in Europe, the U.S. and in emerging markets. This all contributes to the Canadian economy’s weakness in the short term. But next year and the year after will see a 7% to 10% boost in business spending according to TD Economics.
- The Bank of Canada’s overnight interest rate isn’t moving until the second half of 2013. Expect a 50-basis point increase next year, followed by the same again in 2014. From there, look for gradual steps to “bring the overnight rate back to a more normal level,” Petramala told me. One of the effects of the latest round of quantitative easing in the U.S. is that “the Bank of Canada won’t be able to go as quickly as maybe it would like.”
A couple of other interesting calls: the U.S. recovery will strengthen next year; we’ll see more positive growth in the eurozone and emerging markets; and crude oil will hit US$102 per barrel.
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