Canada’s 2014 economic outlook: Boom or bust?

Just how prosperous will Canada be in 2014? It all comes down to which economic forecast you want to believe heading into the New Year.

While most economists are calling for growth comfortably above 2 per cent this year, following a disappointing level set in 2013, at least one economist is calling for the country to be worse off overall in 2014.

“The consensus view that economic growth will accelerate this year is misplaced,” David Madani of Capital Economics said in note to kick of his New Year forecast for Canada.

Madani is calling for annual average gross domestic product (GDP) to grow by a mere 1.5 per cent in 2014, compared to average forecasts of about 2.3 per cent. That compares to his projected growth in 2013 of 1.7 per cent, which is line with other forecasts.

Even though business investment will pickup and exports should improve thanks to a lower loonie, Madani believes 2014 is the year when housing will wreak havoc on Canada’s economy.

He blames the “overbuilt” condo market for his prediction of a pullback in housing construction in 2014. That, in turn, will leave many households – already drowning in record debt – even more cautious about spending.

“We fear that a decline in new housing construction will be a drag on GDP growth,” he says in the report.

And Madani is not alone in his views our housing market is poised for a correction. Nouriel Roubini, the man known as “Dr. Doom” for his pessimistic outlook on the global economy, recently predicted Canada’s housing market as a bubble set to pop.

As it turned out, the housing market made a surprisingly strong recovery and banks racked up record profits in 2013.

Meantime, Bank of Canada governor Stephen Poloz is calling for the often-used “soft landing” scenario, which is a gradual slowly of housing sales and starts.

Madani says that slowdown in housing starts “is likely to be painfully long,” and will “rob the economy of much needed growth.”

His forecast isn’t all bad news though.

He believes Canada’s exporters will do better this year, due in part to a weaker Canadian dollar versus the American greenback, which makes goods cheaper.

Still, he says the gap between exports and U.S. economic activity is “bothersome,” and will take longer to normalize than many had hoped.

What does this all mean for consumers and businesses in Canada?

While many businesses will still struggle, borrowers will continue to enjoy lower interest rates.

In fact, Madani believes the Bank of Canada will grow even more pessimistic even after cutting its economic forecast in October, and possibly cut rates in the not too-distant future.

“At this point, we would put the odds of a rate cut at about 30 per cent,” Madani forecasts.

Many other economists are calling for the next rate move to be up, but not until at least 2015.

Time will of course tell which crystal ball is correct.

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