Canada: GDP growth has peaked - HSBC

Canada’s economic growth has accelerated recently as the headwinds from the decline in oil prices faded and as households borrowed to support consumer spending, notes David Watt, Chief Economist at HSBC.

Key Quotes

“GDP growth averaged 3.8% over the past four quarters, up from an average of 1.1% in the prior four quarters. The recent upswing includes the 4.5% q-o-q annualised expansion in Q2 2017, the highest reading since Q3 2011. As the amount of slack in the economy declined, and even though inflation remained well below the 2% target, the Bank of Canada removed the 50 basis points of easing from early 2015 that followed the earlier decline in oil prices.” 

“Reflecting the recent rate of expansion, and our expectation that the economy will grow at a quarterly annualised rate of 2.2% in Q3, and 1.8% in Q4, we look for GDP growth of 3.1% in 2017. This is up from our prior estimate of 2.4%. Looking further out, we look for slower GDP growth in coming years, anticipating expansions of 1.9% in 2018 and by 1.5% in 2019. The slowdown in growth will reflect consumer moderation, weaker residential investment, and less accommodative financial conditions. Exports and business investment are expected to grow more quickly but not by enough to offset smaller growth contributions from consumption and residential investment.” 

“Weaker consumption spending will reflect, in part, a structural decline in the rate of growth of the labour force resulting from an aging population. We also expect a debt overhang and higher rates to weigh on consumption and the housing market. Although interest rates are still historically low, we believe that the increase in leverage in the past few years leaves the household sector sensitive to even modest increases in interest rates.” 

“We look for non-energy business investment to rise modestly over the next two years, in part as the headwind of the past oil price decline has faded, and corporate profits have improved as growth improved and commodity prices stabilized. That said, low oil prices will continue to restrain investment in the oil sector. Also, investment will slow as several oil projects enter their production phase and there are few new projects to sustain investment flows.”  

“Much of the increased oil extracted in 2017 and 2018 will be exported, and will account for most of the projected increase in exports. Issues of competitiveness will continue to weigh on non-commodity, non-services exports, particularly those sensitive to the Canadian dollar.”