Slower growth ahead – Canada logged the fastest growth among the G7 economies in the first half of the year, expanding by an impressive 4%. We don’t think this pace can continue given economic imbalances and heavy reliance on consumer spending. We expect GDP growth to moderate back toward 2%, with underlying conditions suggesting a recession is not likely in 2018.
Household debt becoming a headwind – Consumer spending and housing investment have risen by more than 4.5% so far in 2017. But, we believe conditions will begin to change. Household debt is nearly 170% of disposable incomes, wages are rising at less than 1.5%, and interest rates have risen; all of which will combine to drive a slowdown (but not a crash) in housing activity and consumer spending, which have accounted for two-thirds of GDP.
Bright spots emerging – Business investment rose by double-digits in the first half, which we’d attribute to optimism stemming from strong economic growth and stabilization in commodity prices. The 219,000 new jobs added this year is an encouraging sign, though it remains to be seen if business spending will maintain its strength in the face of slower GDP growth. Exports have also provided a nice boost, helped by the loonie and faster growth in the U.S., two factors we believe will continue to be helpful.
Action for Investors - We continue to recommend a reduced allocation to Canadian equities and real estate, given economic challenges. Within domestic allocations, we favour large-cap companies that possess competitive advantages and/or diversified earnings streams.
Equity investments involve risk, including the loss of principal.