Canada’s business sector is holding back on investment and governments are in restraint mode, leading to a “humdrum” outlook for the Canadian economy, the Conference Board of Canada says in its latest Canadian outlook.
At the same time, working Canadians experienced weak income growth and are facing higher inflation, meaning they cannot stimulate the economy by spending, the report says.
"The unusually cold winter got economic growth to a slow start this year, but that's not all that is ailing the Canadian economy," said Glen Hodgson, senior vice-president and chief economist at the Conference Board.
"Overall, the domestic economy remains lethargic. The business sector seems to be holding back on hiring and investment, governments are by and large in restraint mode, and households are seeing their purchasing power erode."
2% GDP growth
It all adds up to GDP growth of just two per cent this year, with the domestic economy, which is powered by business investment and household spending, expanding by just 1.3 per cent, the think-tank said in a report released Tuesday.
But it sees greater momentum in the economy in 2015, after the U.S. rebounds toward the end of this year. Real GDP growth in the U.S. is expected to hit 2.3 per cent for the year.
The Conference Board forecast is lower than the Bank of Canada’s prediction that the Canadian economy will grow 2.2 per cent to 2.4 per cent this year.
The Bank of Canada could have lowered interest rates in the face of a weaker economy, the Conference Board said, but a recent uptick in inflation seems to work against any prospect of lower rates. Higher rates likely won’t come until 2015, in line with the U.S. Federal Reserve's plan for rates, the report said.
Its report forecasts business investment will stay on hold until 2015. It sees weakness in energy investment, which has helped power the Canadian economy for most of the past 10 years, because of uncertainty over pipeline projects and LNG projects.
Low commodity prices, especially soft metal and mineral prices, are also blocking further investment in the mining sector.
Manufacturing is doing little to pick up the slack, with growth of just 1.8 per cent this year in office, manufacturing and warehousing investments.
Trade to pick up
However, there is good news from the trade sector, which should turn around in the last half of the year, buoyed by an improving U.S. economy and weaker Canadian dollar. The report forecasts export volumes will jump by three per cent, setting the stage for improvements in the job market and in investment in 2015.
Canada’s job market has been sluggish for an extended period and fewer than 53,000 jobs were created in the first half of this year. The Conference Board report is forecasting the weakest labour market since 2001 in 2014, with just 171,000 new jobs created.
Real personal disposable income is also restrained and consumers are turning to credit to support their lifestyle, the report said. However, it predicts consumer spending will advance 2.3 per cent in 2014 and 2.4 per cent in 2015 as consumers take advantage of low prices that are emerging out of a very competitive retail environment.