Canada’s Economy Muddles Along

By Ari Charney • July 9, 2013 • Canadian Edge Weekly

The outlook for Canada’s slackening economy continues to be mixed. On the one hand, the International Monetary Fund (IMF) boosted its forecast for full-year 2013 gross domestic product (GDP) to grow 1.7 percent year over year, an upward revision of two-tenths of a percentage point. By contrast, the Bank of Canada (BoC) had previously forecast growth of 1.5 percent.

Unfortunately, the IMF is becoming less sanguine about next year, for which it projects growth of 2.2 percent, down two-tenths of a percentage point from its prior forecast and well below the BoC’s expectation of 2.8 percent.

However, Canada is hardly alone: the IMF believes such sluggishness will plague most of the world’s economies, with global growth struggling to exceed 3 percent this year. Among the familiar headwinds, the IMF cited a sustained slowdown in the emerging markets and a European continent mired in recession.

Last year, Canadian GDP rose by 1.8 percent. But the economy grew at a stronger-than-expected 2.5 percent annualized rate during the first quarter, prompting some to hope that perhaps it could continue surprising to the upside.

Then April GDP data dashed those hopes. Although the economy grew for the fourth consecutive month, momentum declined sharply, to 0.1 percent from 0.2 percent in March. And economists believe that historic flooding in the energy-rich province of Alberta could shave as much as three-tenths of a percentage point from June GDP and another one-tenth of a percentage point from July GDP.

Also this week, the BoC published the results of two surveys that show flagging business confidence.

The quarterly Business Outlook Survey showed that firms only expect modest improvement in sales growth over the next 12 months. The positive balance of opinion among the 100 firms surveyed dropped to 9 percent from 24 percent in the prior quarter. Among the firms polled, 42 percent expect higher sales growth over the next year, while 24 percent expect volumes to remain the same, while 33 percent expect a decline.

Consequently, companies remain cautious about investing in growth, with concern that domestic demand is weakening, while US demand is only improving gradually. When firms were asked whether they expect spending on machinery and equipment to be higher, lower, or the same, the balance of positive opinion among respondents ticked lower to 9 percent from 12 percent last quarter.

Among the firms polled, 35 percent expect to increase spending on machinery and equipment, 39 percent will maintain the status quo, while 26 percent said they expect to spend less. Many businesses are deferring projects or deploying capital more judiciously until demand picks up.

Fortunately, demand could be spurred by stronger hiring, as 44 percent of firms surveyed expect to increase employment over the next year, 47 percent will hold at present levels, while just 9 percent believe they’ll have a lower headcount. That’s the third consecutive survey with a rising trend in this crucial area.

Meanwhile, inflation expectations remain muted, with nearly 70 percent of respondents saying Canada’s annual rate of inflation will be no higher than 2 percent. Central bank watchers believe that could catch the attention of BoC Governor Stephen Poloz, since the central bank targets an inflation-control range of between 1 percent and 3 percent. The BoC notes that the number of firms with expectations toward the bottom half of that range has risen in recent surveys.  

Finally, credit conditions show larger firms are still enjoying relatively easy access to capital. That mirrors the results of the bank’s quarterly Senior Loan Officer Survey, which shows a modest easing bias in both price and non-price terms, despite the fact that interest rates have risen in a number of areas. The survey data show that Canada’s business-lending practices have been in easing mode since late 2009.

So it looks like this year will mark a near-term bottom for the Canadian economy, with the possibility of a modest rebound in 2014.

Here’s where to find our analyses for Portfolio Holdings that have reported earnings for the first quarter of 2013:

Conservative Holdings

Aggressive Holdings

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