Deloitte projects modest economic growth for Canada in 2019

Deloitte’s latest economic advisory report projects a year of slower economic growth, a weak Canadian dollar, and a vulnerable economy. Though the dreaded “R-word” (recession) remains a possibility, the consultancy projects modest growth of 1.3% in 2019 and 1.5% in 2020 for Canada.

After posting strong growth of 3% in 2017, the Canadian economy slowed to 1.8% in 2018, and has little momentum heading into this year. Factors such as a drop in residential investment, weaker consumer spending, and a decelerating US economy are projected to moderate growth to 1.3% in 2019, according to Deloitte Canada.

Though the firm says a recession isn’t the most likely outcome, slowed economic growth does make Canada more vulnerable to risks like protectionism, Brexit, and low global interest rates.

Around the globe, economic growth is also trending downwards. Hit by weaker investment, decreased retail sales, and US tariffs, China saw its fourth quarter growth drop to 6.4% year-over-year – its slowest pace since the 2008 financial crisis. Although the country has announced a raft of stimulus spending, Deloitte projects 6.2% growth this year, and 6.0% growth in 2020.

The Eurozone lost momentum as well, improving to only a 0.9% annualized increase in the fourth quarter after 0.6% in the third quarter. The German government lowered its 2019 economic forecast from 1.8% to 1.0% in January, and then further down to 0.8% in March.

Facing down Brexit, the UK had 0.7% annualized growth in the fourth quarter, with the Bank of England reducing its forecast for 2019 to 1.2%.

After massive 4% annualized growth in the second and third quarters, US growth slowed to 2.6% in Q4. The stimulus boost from the 2018 tax cuts will fade by the end of this year, while US exports remain constrained by a strong dollar, softer global demand, and fallout from retaliatory tariffs. Deloitte forecasts US economic growth to dip below 2% in 2020.

In Canada, the real GDP stalled to an annualized 0.4% in the fourth quarter, though if it weren’t for a buildup in inventories, the economy would have contracted by 1.1%. Weakened residential investment was a major factor, plunging an annualized 14.7% in Q4 after a 5.5% decrease in Q3. Residential construction activity declined by 7.5% from a year ago, while real estate activity plunged amid tighter mortgage qualifications, higher mortgage rates, and increased household debt servicing costs.

Household spending increased by a mere 0.7% in Q4 – the weakest showing since the recession – as heavily indebted Canadians tempered their spending on cars and big-ticket appliances. Export volumes decreased 0.2% and imports fell 1.1%, reflecting the weakened consumer spending.

While a $13.2 billion increase in inventory investment buoyed the economy in Q4, Deloitte expects de-stocking in future quarters to hinder economic growth.

The contractions in residential and business investment, however, aren’t likely to be sustained, while low unemployment and rising income should support higher outlays in consumer spending. The Bank of Canada is unlikely to raise interest rates further, arresting increases in debt service costs and supporting real estate. As such, Deloitte projects a modest uptick from 0.4% in Q4 to approximately 1% growth in Q1 2019.

All told, that modest 2019 growth of 1.3% is a likely outcome, since the odds of a Canadian economic contraction are highly unlikely without a US recession or a hard landing in the global economy.

Provincially, BC is projected to have the highest growth over the period of 2019-2020, at slight below 2%. Ontario and Quebec will come in second and third, at slightly above the national average, while Saskatchewan and PEI will be slightly below the average.

Alberta and Newfoundland, hit by last year’s oil price decline, will be a bit above 1%, while Manitoba will struggle in the rankings due to mine closures and the completion of major construction projects. New Brunswick and Nova Scotia are projected to post 0.9% and 1.2% growth respectively – a solid performance given the acute pressure of population aging in the Maritimes.

Deloitte’s economic forecast recommends that businesses prepare for economic headwinds in a proactive manner, and avoid falling into “recession-minded” paralysis that impedes major decision-making.

"Canada is expected to experience sub-par economic growth, and as a result, the economy is vulnerable to any negative surprises,” Craig Alexander, chief economist, Deloitte Canada, said. “In this environment, firms should be mindful of how they are affected by economic changes. Building contingency plans can help businesses to be nimble and seize opportunities even in tougher economic circumstances.

“While job creators cannot immunize themselves for the various shocks associated with economic cycles, they can remain competitive and find advantages over competitors by confronting risks with a plan, and moving forward with key business decisions without delay," he added.