As an eventful year for international trade draws to a close, Canadian entrepreneurs are well positioned to take advantage of strong global growth.
By Pierre Cléroux, Vice President, Research and Chief Economist
It has been mostly good news for Canada’s economy this year, and that gives consumers and business people something to celebrate.
All estimates point to a 2.1% economic growth for the Canadian economy for 2018, a bit slower pace than the 3% growth in the previous year. In the view of the Bank of Canada, this leaves us right where we should be, and it has led the Bank to raise its key interest rate in recent months to its current 1.75%.
Economic expansion remains broad-based, with investment and exports picking up steam. So far, exports are up 2% compared with a year ago. While services and goods exports have grown, the latter haven’t kept up with foreign demand.
Economic expansion remains broad-based, with investment and exports picking up steam.
What it all means: it’s a great opportunity for Canadian businesses to sell more abroad, diversify their markets and push forward the economy as a whole.
Employment keeps rising
It also means more jobs. Canadian jobs grew by 219,000 jobs over the last twelve months, the majority in full-time positions.
More jobs are good for consumer spending, which has been slowing as interest rates rise and people pay down their bills. The Bank of Canada will continue to do a balancing act on rates so as to keep household debt in check while keeping the growth engine running.
Canadian economy expected to grow by 2% in 2019
The Canadian economy will remain solid in 2019 and will likely continue to expand at about 2%. It signals that the country is using current capital and labour at close to full capacity.
From a provincial perspective, British Columbia and central Canada will drive Canada’s growth next year. Should oil prices improve so will prospects for Alberta and Saskatchewan.
Trade tensions won’t stall global economy
Another source of uncertainty possibly weighing on confidence and the loonie are the tariffs on steel and aluminum, which remain in place despite the new deal with the U.S. and Mexico. Given that the new deal will exempt Canada for the first 60 days of the U.S. imposition of national security tariffs to allow the countries to negotiate, the prospect for eventual removal of these tariffs seems positive.
China’s economy continues to expand at a good pace—6.6% this year—but is expected to slow to 6.2% in 2019.
International trade slowed in the second half of 2018 compared with the previous 18 months. While the rise in the U.S. import tariffs from 10% to 25% on US$ 200 billion of Chinese imports has been postponed to April 1, 2019, China will likely respond with additional retaliatory measures. These trade barriers will temper growth across the world.
So far, China’s economy continues to expand at a good pace—6.6% this year—but is expected to slow to 6.2% in 2019. Europe’s and Japan’s economic growth slowed in 2018 hitting 2.0% and 1.1% respectively, and each will slow further in 2019, according to the International Monetary Fund.
U.S. is pulling ahead of most countries
Despite rising import tariffs, U.S. economic growth has propelled global growth over the past year. The key reason: corporate and personal income tax cuts implemented in January 2018. They have spurred business investment and consumer spending. Spillover effects may be expected in Canada as Americans buy more and visit more.
The U.S. is expected to continue its expansion next year, though at 2.5%, versus 2.9% in 2018. The higher interest rate has supported an appreciation of the U.S. dollar against most currencies, including the loonie.
Strong U.S. economy will pressure the Canadian dollar
The Bank of Canada is raising interest rates more slowly than in the U.S., and this means that the loonie will remain low. The bright side of a lower loonie is that Canadian export goods are cheaper and tourism gets a boost.
The new USMCA trade deal helped reduce the loonie’s slide in recent months. Uncertainty remains, given that ratification of the deal isn’t expected until the spring. There are fears that Congress, now dominated by Democrats, might seek changes.
Overall, the loonie is likely to trade within a range of 75 to 80 cents against the U.S. dollar in 2019.
Global benchmark oil prices between US$55 and $75 per barrel are expected in 2019, though may move to the upper part of the range given the new supply cut agreed between OPEC and Russia earlier this month. Canada’s oil will continue to trade at a significant discount as limited pipeline capacity continues to weigh on our ability to export.
Overall, the loonie is likely to trade within a range of 75 to 80 cents against the U.S. dollar in 2019. From its current level, it could creep up a little, perhaps to 78 cents to the US dollar over the course of the year, as various elements of uncertainty dissipate.
Two major trends: people and technology
An aging population and technological change are transforming the Canadian business landscape.
As Canada’s baby boomers are heading to retirement, the growth of Canada’s working age population will remain below 0.2% next year and the decade to come.
A recent BDC study found out that around 40% of Canadian small and medium-sized businesses are struggling to find the people they need to grow. This limits their growth and will eventually impact the economy. Business owners need to get creative to find the talent they need to continue to remain competitive.
39%of Canadian SMEs are struggling to find the people they need to grow.
Only 19%of Canadian SMEs are digitally advanced.
Technology is the second big trend that will continue to affect Canadian entrepreneurs. New technologies are transforming business models and requiring additional investment efforts.
Another recent BDC study found that only 19% of Canadian businesses are digitally advanced. This is a huge missed opportunity as digitally advanced companies are 62% more likely to have enjoyed higher sales growth than all other businesses over the past three years.
Challenges and opportunities for entrepreneurs
Despite labour shortages, technological change, trade tensions and rising interest rates, global economic growth and increasing exports, employment and investments will ensure that Canadian economic expansion remains solid in 2019.
Entrepreneurs who want to take advantage of the current upswing to grow their business need to be agile and focus on attracting and retaining the right talent. Employing under-used resources such and immigrants or older workers, and a focus on technology will help productivity and improve competitiveness.
Business owners who act now are the ones who are going to continue to grow and remain competitive.