Canada's economy is set to slow down even with a NAFTA deal, economists say

Economic growth is expected to slow to 1.3 per cent in 2020, down from 3 per cent in 2017, as rising interest rates put pressure on consumer spending.

CIBC and BMO are expecting growth to fall to 1.8 per cent next year as consumer spending slows

Royce Mendes, senior economist at CIBC Capital Markets, says exports won't drive Canadian economic growth without healthy business investment. (Jacques Boissinot/Canadian Press)

Much has been said about the importance of a trade deal with the U.S. for the Canadian economy, as officials from both sides of the border continue to try to hash out a new agreement.

But, even if a new NAFTA deal is reached, it will not prevent the Canadian economy from slowing down from the robust growth it has seen recently, economists said.

Royce Mendes, senior economist at CIBC Capital Markets, forecasts that gross domestic product (GDP) growth will fall to 1.8 per cent next year, and then drop to 1.3 per cent growth in 2020.

That compares to an expected two per cent growth rate this year, according to the Bank of Canada. The economy grew a strong three per cent last year.

Household spending

"Our research finds that even with a NAFTA deal in place, the long-desired rotation in growth towards exports and business investment will be sluggish and won't offset the coming slowdown in household spending and housing activity," Mendes said in a note on Thursday.

Rising interest interest rates will hold consumers back from spending and make housing affordability even more costly, he said.

"As we've stated before though, that doesn't mean higher interest rates will break consumers' backs. With the unemployment rate expected to hover around six per cent over the next couple of years, households, in general, should be able to service their debt loads," Mendes said. "It will, however, leave fewer dollars for discretionary purchases." 

The Bank of Canada is widely expected to raise interest rates for a fifth time next month since it began its hiking cycle in July of last year.

Export surge a 'flash in the pan' 

Added to that, Mendes said new headwinds, such as the U.S. becoming more aggressive in imposing tariffs on Canadian exports with the current NAFTA deal still in place, represent a red flag for capital investment in Canada.

"Without healthy business investment, we also can't expect exports to become an engine for economic growth," Mendes said. "Last quarter's export surge was nothing more than a flash in the pan, in part due to U.S. buyers front running their own country's tariffs."

Government data last week showed that the economy grew a solid 2.9 per cent in the second quarter of this year thanks to exports, which surged to their biggest increase in four years.

Sal Guatieri, senior economist at BMO Capital Markets, is also expecting growth next year to slow to 1.8 per cent, as reduced consumer spending and housing activity will weigh on growth.

Cross-border transport trucks cross paths on the Peace Bridge at the Canada U.S. border in Buffalo, New York. Preserving free trade with the U.S. is expected to increase economic growth. (Hyungwon Kang/Reuters)

But, he is forecasting a higher number than Mendes for 2020 at 1.6 per cent.

"A NAFTA deal is assumed in our base case forecast. It could raise investment and support growth somewhat," Guatieri said.

RBC senior economist Nathan Janzen said the bank doesn't publish forecasts for 2020, but agrees that growth is shifting lower.

Economists at TD Bank, meanwhile, said they were in the process of updating their growth forecasts, but think growth will likely be a bit higher than what CIBC is suggesting.

"We do expect a more modest pace of consumer spending going forward, and while housing activity should remain a contributor to growth, this sector as well should see more modest growth relative to the past," said Brian DePratto, senior economist at TD Bank.

In terms of NAFTA, Depratto said a resolution should be positive for Canada. However, he said a deal is "more about preserving the gains that we already have" rather than "adding markedly to the economy."