Amid slowing growth, pipelines and digital leadership hold promise

Accounting and consulting firm RSM Canada dished on the latest developments and trends in the Canadian economy in its second quarterly “The Real Economy” report.

RSM Canada’s Financial Conditions Index, a composite measure of risk priced into financial assets, has been pointing to a tougher investment climate and subdued growth in the coming months. The level of stress in financial markets is linked to the willingness to borrow and lend, and as such, the direction of growth in future quarters.

According to RSM, the FCI measure is pointing to subdued Canadian growth in 2019, centred on sub-2% real GDP growth year-over-year. Economic analysts surveyed by Bloomberg are projecting Canada’s economic growth to slow from 2% in the second and third quarters of 2019 to 1.6% by the third quarter of 2020.

The slowdown coincides with pessimistic projections for the US economy, where analysts expect sub-2% growth in 2019 and 2020, while global growth is projected to decrease from 3.6% in 2018 to 2.9%-3.3% in 2019 and 2.8%-3.6% in 2020.

The Bank of Canada is projecting 1.2% growth for Canada this year, with the wild cards of commodity prices and trade disruptions holding significant impact on growth variability.

Long-standing low interest rates have helped drive up Canada’s housing bubble and consumer debt levels. Though low GDP growth is being projected, financial markets are still pricing only a 40% chance that interest rates will be lowered in 2019. RSM’s report relates that a rate cut now might be safer than multiple cuts later.

In response to the issue of further inflating asset price bubbles through rate cuts, the report suggests stronger government policy that limits housing speculation, money laundering, and foreign ownership, as well as creating more low-income housing.

Digital enterprise (economic activity that produces or services technology and telecom, or is involved with e-commerce) is one important expanding area in the Canadian and global economy. According to Stats Canada, nominal GDP for the digital economy grew 40.2% between 2010 and 2017, while the nominal GDP of digital economic activities was $109.7 billion in 2017 (or 5.5% of the economy). In 2017, there were 886,114 jobs associated with digital economic activities, with Ontario and BC serving as the biggest players in the digital economy.

According to IMD analysis, Canada ranked eighth in digital competitiveness, and was the third-largest economy ranked in the top 10 after the US. The rankings were based on knowledge (talent, education investment, scientific concentration); technology (regulatory framework, tech infrastructure, and investment capabilities); and readiness (preparedness for digital transformation and adoptive attitudes).

According to the chart above, Canada’s readiness component hasn’t kept pace with the knowledge base. The government’s 2019 budget attempts to address some readiness concerns with plans to sponsor retraining of the existing labour force and the tech-ification of the education system.

Robust federal expenditures on science and technology have set up the knowledge category well for the future, while openness to immigration should keep the knowledge base growing, according to the report.

Pipeline lifeline

The Trans Mountain Expansion (TMX) project, meanwhile, holds a great deal of economic promise for the country. The 1150-kilometre pipeline stretching to the BC coast won re-approval from the federal government in June.

The Conference Board of Canada projects the pipeline will generate and support 40,000 jobs and $164 billion in gross domestic product. Alberta stands to receive 55% of the pipeline’s economic impact, with BC receiving nearly a quarter of the jobs.

Challenges facing the pipeline include lower oil prices, as supply has increased and demand in developed countries has fallen, as well as protests from indigenous groups over potential environmental impacts. The TMX project, which was bought by the federal government from Kinder Morgan last year, reports that 43 indigenous groups have already signed impact benefit agreements to participate.