Slower growth as consumers carry less of the load – Following healthy growth of 3% in 2017, we think the pace of domestic GDP growth is likely to slow to 1.5%-2.0% this year. Positively, labour market conditions are fairly strong, underpinned by the lowest unemployment rate since the mid-’70s. But the expansion downshifted heading into 2018 and we believe household consumption (60% of GDP) will be curbed by weaker housing investment and rising savings to combat restrictively-high consumer debt levels.
End of the housing boom – We don’t anticipate a collapse in Canada’s housing market but, having accounted for nearly 8% of GDP recently, we think tighter mortgage regulations and higher rates will moderate housing investment, a new headwind for the economy. Home sales activity has dropped notably in Toronto and Vancouver, while inventory levels remain high, a combination that we believe will put additional downward pressure on real estate prices and contribute to more moderate household spending.
A mixed outlook for trade – We anticipate a rebound in exports this year, helped by stronger U.S. demand and the weaker loonie. Policy uncertainties are a risk, however. A global trade war would be punitive to growth and we anticipate the NAFTA negotiations will drag on. Ultimately, we think some concessions from Canada will be required, but a NAFTA resolution this year could unlock pent up investment demand.
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