2020 economic outlook: modest Canadian growth amid uncertainty

Canada's economic outlook for 2020 is improving slightly as a result of growth in the real estate market, residential investment and household consumption, although a number of factors that contributed to the 2019 slowdown remain. These conditions should translate into a growth rate of about 1.7% for the Canadian economy in 2020.

2019 was marked by a synchronized downturn in global economies—nearly 90% of countries experienced lower growth in 2019 than in 2018. This was the case for Canada, where growth declined from 1.9% in 2018 to a meagre 1.5% expected in 2019, which is slightly below its potential.

Again in 2020, growth will be limited by global uncertainty associated with trade tensions, the U.S. elections and the future of Brexit. However, so called internal factors, which once slowed economic activity, have already begun to subside. This is the case in the real estate market, for example. In addition, more than a year since the Bank of Canada's last interest rate hike, most of the impact of the 2017 and 2018 increases has already made its way into the economy, and households have been able to adapt.

Global uncertainty lingers on

Global growth slowed to 3% for 2019, according to International Monetary Fund (IMF) analysis. Before the global financial crisis that began in the summer of 2007, the IMF defined a global recession as worldwide growth below 2% or 3%, according to the research director at the time. However, the Fund did not declare a global recession in 2019.

The global slowdown can be attributed largely to the trade war, which will have slashed nearly $700 billion from the world economy by 2020. This slowdown is not directly related to the tariffs imposed by the Trump administration, but rather, to what they represent: The redefinition of previously established trade rules. Thus, even if the United States and China were to reach an agreement, the conflict has opened the door to a world of uncertainty that will persist for some time.

The easing of monetary policies by more than 21 central banks, including the U.S. Federal Reserve and the European Central Bank, as well as the improvement of the situation in emerging countries such as Brazil, Russia and India should sustain the world economy and increase growth to 3.4% in 2020.

In the United States: Two opposite forces compete

The U.S. expansion—the longest since 1854—will turn 11 next June! Although the U.S. economy has been slowing since 2018, growth remained robust in 2019 and will continue in 2020. The U.S. economy will moderate slightly above its potential next year, achieving 2% growth.

Consumer confidence will continue to be the primary driver of growth in the U.S. in 2020. The labour market continues to expand, with positive job growth and a historically low unemployment rate. Household incomes are also on the rise. This strength will stimulate household consumption and housing starts, which had both slowed slightly in early 2019 in response to interest rate hikes.

The U.S. Federal Reserve delivered three consecutive rate cuts since summer 2019 to mitigate the risks arising from the global slowdown. These cuts will encourage American households to continue spending at favourable rates. However, it would be surprising to see the Federal Reserve deliver further rate cuts in 2020, unless the U.S. China conflict escalates before the elections and the economy sours.

The impact of uncertainty on businesses, which stems in part from the U.S. China conflict, is a strong headwind. Business confidence has softened since the start of the conflict, at the same time the effects of the Trump administration's tax cuts are dissipating. This situation has led to a decline in investments in the United States and limits economic growth. As uncertainty is expected to continue, and global demand to slow, it’s likely that investments in the United States will be limited again this year. Next November's elections are an additional source of uncertainty for U.S. businesses.

The Canadian economy is slowly improving

It’s against this backdrop that the Canadian economy is expected to improve in 2020. The major challenges remain global uncertainty, trade tensions and difficulties in the oil sector. However, the real estate market and residential investment are expected to continue to gain ground slowly.

Business investment prospects are likely to remain rather weak in 2019. Uncertainty and trade tensions are reducing business investment, while the slowdown in the Chinese economy is pushing down commodity prices. Moreover, some commodities experienced a drop in exports and a difficult year. That is the case for canola and other agricultural products, as well as aluminum, for example.

Despite slower global growth, Canadian exports showed resiliency in 2019. This phenomenon is expected to continue in 2020, but could be affected by the slight slowdown in the United States, since 75% of Canada's exports go to our southern neighbours.

Oil prices to stay relatively low

The oil sector continues to present major challenges for the oil producing provinces. While at this time last year, the Alberta and Saskatchewan economies were expected to take off again as a result of new transmission capacities from the Enbridge Line 3 replacement, delivery delays led the Alberta government to extend oil production restrictions to 2020.

The global economic situation suggests that demand for oil will shrink, putting downward pressure on prices. Crude oil prices are expected to remain relatively low again this year.

Households: The engine powering Canada’s economy

So, how can we say that the economy is improving? The answer lies with Canadian households.

One of the causes of the slowdown that began in 2018 and continued through the first half of 2019 was the downturn in the real estate sector. Restrictive provincial policies in British Columbia and Ontario, the introduction of the stress test and rising interest rates all contributed to this downturn. However, households have finally adapted to these changes.

The rebound in household investment is due in part to labour market strength. Despite modest growth in Canada, the economy created nearly 360,000 jobs in the first 10 months of 2019. Unemployment rates have reached historic lows in multiple provinces. Although many businesses are struggling with a lack of employees, labour shortages are driving up wages.

After over a year of stable interest rates, mortgage rates began to fall mid year. The Bank of Canada is expected to hold the key interest rate at 1.75% through 2020, as it also anticipates a recovery in the country's economy. In addition, although several central banks have begun easing their monetary policy, the debt load of Canadian households remains very high, while the savings rate is down in a number of provinces. The Bank of Canada will likely be more reluctant to cut rates considering that a decline could worsen the financial situation of households.

Quebec and British Columbia leading growth

Thus, 2020 should be marked by a recovery in the real estate market, residential investment and household consumption. Of course, the situation differs from province to province. British Columbia and Quebec will continue to lead the pack, while the biggest improvement is expected in the Prairies after a rather difficult 2019. The Maritime provinces should continue to post positive growth as a result of population increases, particularly in Nova Scotia and Prince Edward Island.

In closing, growth in the Canadian economy is expected to increase slightly in 2020, from 1.5% in 2019 to 1.7%. A number of factors that were at the root of last year's slowdown will continue to hinder the economy's performance, but positive signs have already begun to emerge, particularly in the residential market. On the contrary, oil prices, interest rates and the loonie should all remain fairly stable and relatively low.