Who’s right about the economy?

Contrasting growth forecasts from the Bank of Canada and the IMF reflect a general divergence of opinion on the right path forward

Whisper it quietly, but Canada’s economy is showing signs that the miserable performance of 2015 wasn’t part of a long-term negative growth trend for the country.

“Canada’s economy is recovering strongly after a mid-2015 swoon, and tailwinds to growth are accelerating.” That was the pronouncement of Alexander Lowy, associate economist at Moody’s Analytics, speaking in April as the nation’s economic prospects took a turn for the better when oil prices bounced back and the loonie followed suit.

“Macroeconomic adjustments are playing out across the economy in response to structural shifts in the global oil market, but economic data suggest that the worst is now in the rearview mirror,” Lowy said, acknowledging that while Canada is slowly but surely moving away from its longstanding energy dependence, the industry’s well-being will remain tied to the overall health of the economy for some time yet.

That’s not to say everything is copacetic out West – far from it, in fact. Drilling in Western Canada fell 46% in the first three months of 2016, which marked a 30-year low. With further spending cuts and job losses to come, the oil & gas industry is redefining itself for the market as it stands today – extremely temperamental.

Despite the failure of the Doha talks to find an agreement on freezing oil supply, experts believe some sort of compromise between OPEC members and Russia is in the works. All those concerned have suffered greatly from the latest oil shock, but given that the price of US crude has risen from a low of US$26 per barrel in February to above US$43 in April, it appears likely that wiser heads will ultimately prevail. 

Any recovery in energy will obviously be great news for Canada as a whole, but especially so for the beleaguered provinces of Alberta, Saskatchewan and Newfoundland, which have endured more than their fair share of hardship since oil’s collapse.

Another indicator that Canada may be moving in the right direction is the loonie’s elevation since the lows of earlier this year – at press time, the Canadian dollar stood at US$0.79. That has both positive and negative effects, however. It’s good for the many Canadian consumers who have watched their grocery bills surge since the loonie took its big tumble. On the flip side are the many manufacturers that have fuelled Canada’s recovery this year as the cheap loonie allowed them to be much more competitive internationally.

But since a return to parity with the greenback is unlikely anytime soon, Canadian exporters should still remain an attractive proposition. The loonie’s current position should also prove beneficial to tourism as Canadians forgo heading South and Americans elect to vacation in the Great White North. Shoppers coming from the US also have provided a significant boost to retailers close to the border. 

That said, there’s no need to get carried away with sunny projections for the economy just yet. Moody’s foresees the growth rate for 2016 to fall short of 2%, similar to the Bank of Canada’s prediction of an increase of 1.7% in GDP. But for every BoC report expressing optimism, there’s a counter viewpoint stating that Canada’s energy heartache and its repercussions are far from over.

The International Monetary Fund’s World Economic Outlook, released in April, cut its prediction for Canada’s growth from 1.7% to 1.5% for 2016, and from 2.1% to 1.9% for 2017. This reflected its global forecast generally; worldwide growth was reduced from 3.4% to 3.2% for 2016 and from 3.6% to 3.5% for next year. Canada, the IMF argues, is far from immune to global uncertainty, and its considerable energy exposure makes it vulnerable, as was proven definitively in 2015.

John De Goey, portfolio manager at Industrial Alliance Securities, believes the  IMF’s forecast looks much more likely. “My long-term view of Canada – and pretty much all Western economies, for that matter – is tepid growth,” he says. “That will persist at about, or probably less than, 2% annualized
for as far as the eye can see – probably a decade and possibly a generation or two.”

One factor that could work in the Canadian economy’s favour is the Liberal government’s upcoming $11.9 billion infrastructure program – although it has plenty of naysayers as well. Such spending will leave the country with a $29 billion deficit for the year, which the prime minister argues is a
calculated risk to kickstart the economy. The Liberals hope a resulting consistent positive growth rate will allow them to balance the books when Canada is solidly back on its feet. 

However, critics of the plan say that if said growth doesn’t materialize – which, given the global outlook, is certainly a possibility – Canada will be left with huge debt that will take many years to reconcile.