Canada's economy going from a 'sprint to a marathon' pace

The Canadian economy's surprising run for most of 2017 will likely start to decelerate this year as the country reaches its peak capacity for rapid growth, experts say.

Experts predict GDP figures will fall short of central bank's prediction for the last quarter of 2017

Growth in the Canadian economy is projected to slow from 3 per cent in 2017 to around 2 per cent this year. (Chris Young/Canadian Press)

The Canadian economy's surprising run for most of 2017 will likely start to decelerate this year as the country reaches its peak capacity for rapid growth, experts say.

Gross domestic product (GDP) figures for November, to be released Wednesday, are expected to show the Canadian economy grew 0.4 per cent from the previous month.

While that signals a solid bounce from October's flat reading, it still falls below the 0.5 per cent or higher needed to meet the Bank of Canada's growth forecast of 2.5 per cent for the fourth quarter.   

Economists who spoke with CBC News expect the numbers to show Canada's growth in the fourth quarter fell to around two per cent, down from an average of about three per cent in the first half of the year.

They expect growth to fall further this year, to around two per cent, and then dip below two per cent in 2019.

"Canadian growth probably peaked in 2017 and will moderate into next year, but this is more about going from a sprint to a marathon-like pace than coming to a full stop," said Frances Donald, senior economist at Manulife Asset Management.

The experts say two per cent growth is still very healthy for a country like Canada because it's above the potential growth rate — the level of output an economy can produce at a constant rate of inflation.

'Meaningful shocks'

But a growing list of uncertainties that includes the rise of the minimum wage in Ontario and Alberta, new mortgage rules, NAFTA negotiations and the impact of three recent interest rate hikes could create "meaningful shocks," Donald says.

Uncertainty on the trade front, in particular, remains one of the biggest issues the Bank of Canada will be dealing with this year when deciding on monetary policy.

"At this point, we've got two more rate hikes pencilled in the second half of the year, but we'll see what happens with NAFTA," said Douglas Porter, chief economist at BMO Financial Group.

Royce Mendes, senior economist at CIBC World Markets, says increases in the central bank's benchmark interest rate usually take about six to eight quarters to filter through the economy as a whole and affect consumer spending habits.

"It's maybe a little bit faster than that nowadays, but it still takes time, and I don't think we've fully seen the effect of past rate increases," he said.

Canada vs. world

While Canada's growth is expected to decelerate, experts are less united on whether the rest of the world will follow.

Last week, the International Monetary Fund (IMF) raised its global growth forecast for 2018 and 2019 to 3.9 per cent, up 0.2 of a percentage point from its estimate in October.

The IMF said sweeping tax cuts in the U.S. are likely to boost investment in the world's largest economy and help its main trading partners.

But BMO's Porter said Canada will only get a "little benefit" from tax reforms in the U.S., because it's still mostly a U.S. story.

The IMF expects the U.S. to grow by 2.7 per cent this year, up from 2.3 per cent in 2017.

CIBC's Mendes says the tax cuts will actually hurt Canada's competitiveness by making it more difficult to attract new businesses and talent.

"A stronger U.S. economy will always support growth in Canada, but loss in competitiveness hurts us in attracting capital or people."

However, as Manulife's Frances Donald points out, a cheaper Canadian dollar and growing foreign demand for Canadian goods should be a helpful combination for exporters this year.