Economic Outlook

The North American economy appears to be gaining a bit of footing. U.S. growth has been solid and should benefit from healthy labour and housing markets along with the recent rise in consumer confidence. Canada's economy has shown a notable rebound in recent months, but we think it will settle back toward more modest growth over the balance of the year. Positively, underlying fundamentals suggest a recession for Canada and the U.S. is still unlikely any time soon.

Asset Class Returns chart
Source: Bloomberg, 3/31/2017.


Domestic rebound is encouraging but not sustainable

After average monthly growth readings of -0.01% from the start of 2015 through mid-20161, the domestic economy has rebounded solidly in the past several months. Oil's rebound from last year's lows and firmer U.S. growth have led the return to a positive trade balance, driving the lift in GDP. We think Canada will post modest growth this year, but will fail to maintain the recent pace, as improving manufacturing activity and oil and mining output is tempered by weakness in business and construction investment along with tepid wage growth.

U.S. economy looking better

We expect some acceleration south of the border, with GDP rising by roughly 2.5% versus 1.6% last year. Healthy labour market trends, including faster wage growth, and a re-emergence of business investment (which contracted in 2016) will be key drivers. Retail sales have perked up in recent months, while manufacturing activity surveys, consumer confidence and active drilling rigs have surged to multi-year highs, confirming that the economy is on firmer footing. That said, we don’t anticipate President Trump’s pro-growth policies to have a direct impact on U.S. GDP until next year.

Trade headwinds subside but uncertainties persist

Gross exports are about one-quarter of Canada’s GDP, but export activity – hurt by falling oil prices, slower manufacturing activity and moderate U.S. growth – has been a drag on domestic growth. A rebound in oil and faster growth south of the border will help (the U.S. accounts for three-quarters of exports), but the uncertainties related to U.S. trade policies and the potential for tweaks to NAFTA are likely to delay a sharp lift in the export surplus in the near term. We don’t anticipate overly-punitive changes with U.S. trade, but a more diversified export destination base would be a benefit for Canada longer term.

Action for Investors
Improving economic growth in North America offers ongoing support for equities, while the moderate pace of acceleration will mean interest rates remain relatively low in the near term. As the enthusiasm of the "Trump Rally" dissipates, we expect ongoing changes in leadership among equity sectors. We recommend rebalancing sector allocations, trimming overweight exposures in sectors that have outperformed since the election. Imbalances in the domestic economy warrant a slightly reduced domestic equity allocation; we recommend an increased international allocation.

Important Information:


1. Bloomberg

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

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