Sluggish economy in 2016, but no recession: Conference Board of Canada

The Conference Board of Canada is downgrading its 2016 growth forecast for Canada as the economy continues to suffer from the further deterioration in oil prices.

The Conference Board’s Canadian Outlook: Winter 2016estimates that the economy grew by 1.2 per cent in 2015 and is forecast to grow by just 1.7 per cent in 2016.

“Although much of the recent weakness was contained to the energy sector, other areas of the economy, such as household spending, exports and manufacturing have failed to pick up the slack,” said Matthew Stewart, Associate Director, National Forecast.

“Stronger economic growth will not happen until next year when a recovery in the non-energy sector is finally expected to take hold.”

HIGHLIGHTS

• The Canadian economy will remain sluggish through 2016, with expected growth of 1.7 per cent.
• With oil supply expected to outpace demand this year and next, oil prices will likely remain below US$50 a barrel until the end of 2017.
• Business investment will see a third consecutive year of decline, led by large cuts in the energy sector.

World oil prices are expected to increase from their January average of under US$30 per barrel, mainly because of cuts in U.S. production expected this year. However, with inventories continuing to rise, world oil prices are not forecast to exceed $40 this year. Given the persistently low prices, oil firms are expected to cut their real capital spending budgets by 16 per cent in 2016 following a 24 per cent reduction last year.

Construction and equipment rental demand is expected to decline, says the Conference Board of Canada.

However, falling business investment will not be contained to the energy sector. Building construction is expected to decline this year due to sluggish demand and rising vacancy rates. At the same time, machinery and equipment spending has been hampered by weak business confidence, sluggish global growth and the impact of a weak loonie on businesses’ ability to purchase foreign machinery. In all, real business investment is expected to fall by 2.4 per cent in 2016.

Consumer spending has been one of the main drivers of economic growth over the last several years. However, faced with another year of weak employment and disposable income gains, combined with record high debt levels, Canadians will be hard pressed to open their wallets further in 2016. Overall, real consumer spending is expected to rise by 1.9 per cent this year.

Following a disappointing 2015, high hopes continue to be placed on the trade sector to fuel Canada’s economy. Despite the export sector’s sporadic performance, the weak Canadian dollar and stronger U.S. economy will allow the trade sector to contribute to overall economic growth in 2016.  Export volumes are forecast to expand by 2.5 per cent in 2016, adding 0.6 percentage points to the Canadian economy.

Another area that is expected to provide a boost to Canada’s outlook is the public sector. The new federal government is expected to pump around $10 billion into the economy in fiscal years 2016-17 and 2017-18. This adds about 0.3 per cent to real GDP growth this year.

Glen Hodgson, the Conference Board’s Senior Vice-President and Chief Economist, will present his analysis of the latest economic numbers for Canada, its provinces, the United States, and the world at a live webinar on February 17, 2016 at 02:00 PM EST.