Exports to drive Canada’s economic engine: report

Canadians can feel good about the country’s economic growth for at least the next two years thanks in large part to an expected surge in spending south of the border.

In its fall outlook report, the Conference Board of Canada is forecasting the country to grow by a modest 2.4 per cent next year and 2.6 per cent in 2015, which is a 44-per-cent pickup from 2013’s sluggish 1.8 per cent GDP estimate.

“Better times are in store over the next two years,” the Conference Board says, citing improved outlooks in the U.S. and the global economy.

Low interest rates and growing business and consumer confidence will help drive growth within Canada, alongside an anticipated rise in exports.

The Conference Board says Canadian exports are forecast to grow by 3.7 per cent next year and 4 per cent in 2015. That compares to a disappointing 1.4-per-cent performance expected this year.

“While the export sector won’t make any major gains in 2013, it is on the mend,” says the report.

The Conference Board believes a strengthening U.S. economy will offset the elevated loonie’s impact on exports.

“Despite the lacklustre performance of the export sector this year, the trade sector has not been a major drag on the overall economy,” the report notes.

Canadians exports have underperformed when compared to the last two recessions in the 1980s and 1990s, according to a recent report from RBC.

It notes exports fell to 1.5 per cent in 2012 from 4.7 per cent in 2011, across a number of sectors such as autos and a wide range of commodities.

Bank of Canada governor Stephen Poloz has called on Canadians to be patient for a rebound in Canadian exports, which he says is coming.

Meantime, the bank has stopped saying interest rates will soon rise, while recently adjusting its own Canadian growth forecast down to 2.3 per cent for 2014, from forecasts of 2.7 per cent made months earlier.

The Conference Board is a tiny bit more optimistic in its forecast, including its predictions that import activity will bounce back from 1.2 per cent this year to 3.1 per cent in 2014 and 3.4 per cent in 2015.

“While imports have grown faster than exports since 2001, that is expected to turn around—and the trade sector will no longer be the major drag on overall economic growth it has been over the past few years,” the report says.

Economists at TD Bank are thinking along the same lines as the Bank of Canada and the Conference Board, predicting the economy to grow 2.4 per cent next year and 2.6 per cent in 2015, citing too growth in the U.S. and overseas.

“However, there are limits to how fast the Canadian economy can expand given the current financial imbalances in the household sector,” TD economists warn in a recent note.

The ratio of household debt to income hit a record high in the second quarter of 164.4 per cent, up from 162.1 per cent three months earlier, according to Statistics Canada.

That said, the pace of growth slowed between April and June 2013 and the same time in 2012, which economists say is a good sign.

Ottawa and the Bank of Canada continue to express concerns about how much debt Canadians are taking on, especially through cheap mortgage rates.

The government has tightened mortgage rules four times over the past five years, most recently in the summer of 2012. The goal is to make it more difficult to rack up debt, especially when mortgage rates rise, which could leave some homeowners unable to pay the higher rates.

TD forecasts Canada’s economy will grow by an average of 2.3 per cent over the next five years as the household debt-to-income ratio stabilizes and the red-hot housing market slows.

“A more modest pace of borrowing over the medium term should keep a lid on consumer spending growth, while a slowing housing market will also influence Canada’s economy over the next several years,” TD says. “Fortunately, as the global environment improves, exports are set to play a bigger role in driving Canada’s growth.”