Canada / Spotlight Reports
Gross Domestic Pullback: GDP Concerns in Canada
by Ediz Ozelkan Analyst
Oct 18 2018

GDP growth in 2017 was a sign of a booming Canadian economic landscape. Its temporality is self-evident, with quarterly GDP in 2018 languishing amid a litany of macroeconomic factors. The Canadian Imperial Bank of Commerce and the Bank of Montreal have both released a forecasted cooldown in GDP expansion in upcoming years even with the potential implementation of the United States-Mexico-Canada Agreement (USMCA). IBISWorld projects GDP to grow an annualized 2.1% between 2013 and 2018, and expects it to grow more slowly over the next five years with a forecast annualized 1.7% expansion. This river is being dammed by higher interest rates, rising debt levels, stricter mortgage rules and a slowdown in consumer spending which is expected to hinder the housing market over the next five years. Plus, crude oil prices are rising but domestic extractors and refiners have had trouble disseminating their products, simultaneously the result and leading cause of an increasing disparity between the West Texas Intermediate (WTI) and Western Canadian Select (WCS) spot prices for oil.

2017: A Short Run

GDP grew 3.0% in 2017, although the majority of this growth was in the initial half of the year with an annualized 4.0% and 4.6% expansion in Q1 and Q2, respectively. The following two quarters exhibited comparatively anemic growth of 1.7%, respectively, on an annualized basis. This expansion occurred alongside an 11.0% spike in housing starts, a 0.7 percentage point decline in unemployment rates, a compression in the WTI to WCS spot price differential and a 3.0% rise in capital expenditures that year. The year 2017 was strong for the housing market. It was also a year of a boost in capital investment, a rise in consumer spending and an increase in the relative value of Canadian oil, which helped bolster the economy in various sectors.

Housing starts grew slowly between 2013 and 2016 at rates under 3.5% annually, demonstrating the significance of the massive jump in 2017. Capital expenditure decreased between 2013 and 2016, then grew in 2017, with a 18.8% jump in educational services and a 14.7% uptick in the management of companies and enterprises. Corporate profit rose 32.1% in 2017, which instigated this investment activity. The WTI to WCS spot price differential decreased from an average of 49.8% in 2016 to an average of 30.7% in 2017. Consumer spending grew at its quickest pace since 2010, rising 3.4% in 2017, while consumer debt grew 4.8%. Projections for 2018 tell a different story.

In 2018, IBISWorld expects GDP to grow 2.1%. Q1 growth was slow at 1.4%, considerably lower than Q1 2017, while Q2 showed a marked improvement from the previous quarter with a 2.9% increase alongside a 10.3% jump in exports. Still, Q3 results have not been released, and these figures will reflect the effect of US tariffs and a cooling in many other macroeconomic factors, which ultimately resulted in the Bank of Canada keeping interest rates steady at 1.5% in September. Capital expenditures are expected to cool to a 0.8% gain this year while housing starts are anticipated to drop 4.6% as new mortgage restrictions took hold in January 2018. Consumer spending growth is projected to slow to a 2.2% increase while the WTI to WCS spot price differential rises to 48.9% in 2018 with the largest jump in Q1. All of the indicators that propped up the economy in 2017 are fading away.

Macro Under the Microscope

Within this landscape, there are key sectors and industries that aided the expansion of domestic GDP over the five years to 2018. The fastest revenue growth among all of the industries that IBISWorld covers is projected to occur in the Cannabis Production industry in Canada (IBISWorld report 11141CA) and the E-Commerce and Online Auctions industry in Canada (45411aCA). Similarly, these two industries are expected to exhibit the fastest growth in what they contribute to the economy. IBISWorld’s measure of industry value added is calculated to express an industry’s contribution to the economy. Over the five years to 2018, the cannabis and e-commerce industries are expected to increase their economic contributions 6213.8% and 198.0%, respectively, amid rising profit margins and boosts in capital investments. However, even with their profound expansion, their outlooks are subdued. While revenue is projected to increase 6173.8% between 2013 and 2018 in the cannabis industry, the next five years are forecast to exhibit growth of a much more muted 257.4%. Meanwhile, the e-commerce industry’s 153.8% growth over the five years to 2018 is expected to slow to 50.6% over the five years to 2023. Although both industries are forecast to still exhibit strong growth, the reduced rate is indicative of the broader slowdown in the economy. E-commerce will continue to eat into total retail spending, but the slowdown in consumer spending means that it will be gaining a bigger share of a smaller pie.

CA IVA

At the sector level, capital expenditures over the five years to 2018 are harbingers of where growth potential lies in the near term. Mining, quarrying and oil and gas extraction businesses have greatly diminished their capital outlays 48.2% during the five-year period due to price disparities, which exacerbated a collapse in crude oil prices in 2015 as well as a bottleneck of Canadian crude due to a dearth of transportation options. Meanwhile, the retail sector diminished its capital outlays 17.1% while administrative and support services reduced capital investment 11.0% during the same period. Conversely, the largest growth in capital expenditures was recorded in the information and cultural industries (56.4%), educational services (50.9%) and the real estate sector (41.4%). Investment in real estate, which represents 5.9% of total capital expenditures domestically in 2018, and in the transportation and warehousing sector (9.5% of outlays), suggests that there is a widespread reliance on real estate for GDP growth. Furthermore, the mining and energy sector comprises 18.2% of all capital investment in 2018, down from 32.8% in 2013. This helps illustrate an increased emphasis on real estate and a reduced reliance on commodities, which is a highly vulnerable section of the economy.

sector capex

Temporary Growth, Tempered Outlook

Various macroeconomic indicators point toward the evanescence of strong 2017 economic growth. Major financial and economic institutions are concerned about the future of the domestic economy and have numerous signals for their renewed forecasts. Despite the recent optimism surrounding the USMCA, persistent threats to consistent GDP growth remain evident. Domestically, a housing market that is forecast to wane, the disparity between WCS and WTI spot prices for crude oil, rapidly rising debt levels and a slowdown in consumer spending are expected to hinder economic performance in upcoming years. Meanwhile, concerns about a weakening emerging market landscape and an anticipated deceleration of the US economy affect Canadian trade prospects, which were at the heart of its recent expansion. Over the five years to 2023, IBISWorld anticipates housing starts to fall 5.7%, consumer spending to grow a comparatively slow 8.4% and household debt to climb 14.3%. The combination of ebbing demand from the housing market, slower consumer spending and skyrocketing debt levels domestically alongside various global economic concerns, is projected to hinder GDP expansion over the five years to 2023.

Edited ByTafannum Rahman