Canada’s surprising economic strength has it leading the G7 nations in growth this year, but there are obstacles on the horizon - perhaps none more pressing than the Trump Administration’s hardline on NAFTA.
“The number one risk to the outlook is the renegotiation of NAFTA,” Craig Alexander, senior vice-president and chief economist at The Conference Board of Canada, told BNN in an email.
“Canadian industry is integrated into a North American market and North American supply chains.”
After a blowout second quarter that saw growth of 4.5 per cent, economists at home and abroad have been hiking their Canadian growth targets for 2017.
“Canada's economy will lead the G7 in growth this year, but the rebound to three per cent or better growth is partly a rebound from the commodity-shock induced weakness over the past two years,” said Alexander.
“In 2018, the pace of growth should moderate toward a still-healthy two per cent pace.”
That “still-healthy” growth target depends on a number of economic drivers, but looming over almost all of them is Canada’s relationship with its largest trading partner.
The U.S. consumed more than $300 billion in Canadian goods and services in 2016, including auto parts, agricultural products, and energy.
But the U.S. needs us, too: The Office of the United States Trade Representative notes Canada was the largest goods export market for the U.S. last year.
BMO Chief Economist Doug Porter agrees “the possibility of the NAFTA talks going off track” is the biggest risk to Canada’s economic outlook.
Beyond that, Porter says the usual “cyclical risks” could dent the country’s growth.
“U.S. and Canadian consumers will eventually lose steam as rates rise,” said Porter. “But that's probably more of a medium-term risk.”
The Canadian consumer has been largely responsible for carrying the economy since the Great Recession, but that’s come at a cost. Households are carrying record debt: $1.68 for every dollar of disposable annual income.
So while Canada leads the G7 in economic growth, it “also takes first place when it comes to household indebtedness,” David Madani, senior canada economist at Capital Economics, wrote in a note to clients Friday.
A large part of that debt is tied up in mortgages. The Bank of Canada is among a chorus of voices that has sounded the alarm about “imbalances” in Canadian real estate as home price gains vastly outpaced incomes.
“Overall, debt-fueled economic growth isn’t a recipe for long-run success, since it is mainly being driven by rising household financial leverage,” said Madani.
“As things stand now, we worry that Canada is headed for a financial crisis of its own making.”
The cost of borrowing is now on an upward move, with the central bank raising its key rate twice this year. Future increases will continue to test the ability of households to service that record debt load – and the pace of hikes is key.
“The Bank of Canada is expected to only gradually and slowly raise rates,” said Alexander.
“However, if economic growth does not slow and inflation risks rise, it could force the bank to deliver more monetary tightening.”