This is not shaping up to be a great year for the Canadian economy. We need to expect slower economic growth.
Based on my observations of the real world, here are my predictions for Canada in 2015:
1. Growth in Canada will remain weak
Most economists are predicting stronger growth in Canada in 2015, largely based on the US recovery. But I just don’t see that happening.
There are too many uncertainties: the slump in oil, the over-indebtedness of households, the imminent collapse of Europe, and the fact that I don’t see the US recovery as being that strong (see below). All this adds up to a weak year for the Canadian economy. A marked slowdown toward the end of the year is not out of the question.
2. Oil will continue to slump
There will be winners and losers. Among the losers in Canada will be Alberta, Saskatchewan and Newfoundland.
There will be a sizable decline in oil-industry investment and new exploration, which will reverberate through the country. Those three provinces will begin fiscal cutbacks in an attempt to compensate for the lost revenues and unemployment in those provinces will surely increase. Among the winners will be consumers who will gain some $15 a week in pocket money, which will certainly give a boost to some target industries.
Overall, I don’t see the benefits outweighing the negatives, and the net result will be a drag on the Canadian economy.
3. The Canadian dollar will continue its slide
The US dollar will continue to strengthen at the expense of the Canadian dollar, which will continue to decline into the low 80s. But this is a good thing. I always found strange the reference to a ‘strong’ and ‘weak’ Canadian dollar based on how high or low it goes. In fact, I would call a low Canadian dollar the ‘strong’ dollar, as it generates exports and creates jobs. Let’s stop seeing a high dollar as a source of national pride.
4. Possibility of a continued federal fiscal deficit
The federal government has gone on somewhat of a spending spree in the last two months, leaving very little left over in case of emergencies. The continued slide of the price of oil will threaten Ottawa’s fiscal position and push the federal books into deficit.
The only way to prevent this is with some creative accounting, increased taxes or some important cutbacks. My guess is on the latter as the Harper government will try to avoid at all costs a deficit and balance the budget.
5. Canada will slip further in world ranking
In 2013, Canada slipped out of the top ten of the annual United Nation's Human Development Index. We ranked first for most of the 1990s but now, for the first time, and under Conservative rule, we slipped to 11. We made the top 10 spot (barely) in 2014 after adjustments for income and education inequality but I don’t see this being maintained.
We need more government in the economy, not less. We need to invest in education, infrastructure, and reduce wealth inequalities. Other countries are doing better than us in these areas.
6. Rise of interest rates in the US, but not in Canada
This is another prediction that goes against the mainstream. I don’t see inflation being a problem in 2015 and with the possibility of a slowdown, there is no reason for the Bank of Canada to raise rates in 2015. Also, with the discrepancy between Canadian and US rates, Canada can resist raising rates even if the US raises rates a few times.
I would expect rates in Canada to begin rising in 2016.
7. Increased household debt levels
Consumers will continue to increase their already-very-high debt loads in 2015. The government will have to deal with this problem soon or it may end up blowing up in their faces.
8. The real estate question
Now that the Bank of Canada has officially acknowledged the existence of a bubble, I expect the federal government to tighten mortgage and lending rules in 2015. First-time home buyers may find it more difficult to qualify for a mortgage.
On the international front, two problem areas remain a threat to Canada’s recovery:
9. A slowdown of the US economy
It will be difficult for the US economy to continue the strong growth it displayed in the second and third quarters of 2014 (4.59 per cent and 4.97 per cent, respectively). These were exceptions.
In fact, there is increased evidence that most of that expansion was driven by spending on health care services following the introduction of Obamacare. I would not be surprised to see an important correction in the fourth quarter of 2014 and the first quarter of 2015.
There are several factors that will contribute to slowing the US economy in 2015, which then will further complicate economic growth in Canada. Americans are even more indebted than Canadians, and with the increases in US interest rates soon, this will put a damper on spending.
There has also been a marked slowdown in US private sector investment. Finally, as a colleague reminds me, Republicans now control both houses of Congress and they will be pushing for massive fiscal cutbacks.
10. Europe will deteriorate even further
Weak growth and a possible Euro-recession is a real possibility.
This will mean higher unemployment across Europe, which is also facing the threat of deflation, meaning the possibility of another debt crisis arising. This will impact our own weak recovery.
Economists don’t read crystal balls and predictions are difficult to get right. But there is some value in trying to identify the possible course of key variables. But as Canadian economist John Kenneth Galbraith once said, “the only function of economic forecasting is to make astrology look respectable.”
Louis-Philippe Rochon is an associate professor at Laurentian University and co-editor of the Review of Keynesian Economics.