2017 Year in Review and 2018 Economic Outlook

• 2017 was a strong year for the Canadian economy. Bolstered by a surge in the first six months, and another year of prolific household spending, GDP growth across Canada will be in the range of 3.2 per cent for the year – the fastest growth since 2005.
• Consumer spending in 2017 was fueled by solid job creation and wage growth across the country. Employment growth was the best in a decade and the unemployment rate ended the 2017 at a 40+ year low.
• It was also a good year for Canadian manufacturing. Driven by a recovery in petroleum refining and machinery production, sales grew by an estimated 5.3 per cent in 2017 to reach an all-time record of about $645 billion. That growth came in spite of a major slump in the auto sector in the second half of the year.
• Manufacturers added 30,000 new jobs and the sector’s unemployment rate plunged to 2.7 per cent by the end of the year. That rate is far below levels associated with full employment and speaks of significant unmet labour demand.

• Economic growth in Canada will slow in 2018, returning to more typical expansion rates in the range of 2.0-2.3 per cent.
• Most major economies are expected to see solid growth in 2018 relative to their historical averages. Global GDP growth is expected to accelerate, driving up demand for commodities and benefiting Canadian exporters.
• Employment and wage growth in Canada should keep household spending strong entering 2018, but there are concerns about high consumer debt levels and the impact that tighter mortgage lending rules will have on the housing market in some cities.
• The Canadian job market will cool down in 2018, with slower employment growth and a higher jobless rate. Alberta and Saskatchewan, which are still digging their way out of localized recessions, are possible exceptions.
• Interest rates will likely rise modestly this year – with a total increase of about 50-75 basis points when all is said and done. Meanwhile, all the uncertainty surrounding the future of Canada-US trade relations is likely to drive the exchange rate lower – by an average of about 3-5 cents US for the year.

1. Minimum wage increases. Opinions are divided and the rhetoric is heated. Basic economics suggests that employers will look for ways to minimize the impact. But will the promised benefits override the expected negative consequences?
2. Canada-US trade relations. Literally no one knows what will happen to NAFTA in 2018, but Canada’s tough stance at the WTO suggests that our negotiators are not going down without a fight. The question is, will all this uncertainty drive risk-hedging investment out of Canada into the US?
3. The impact of the US tax bill. The business tax climate in the US has suddenly improved considerably and with that comes concerns about Canada’s own tax competitiveness and ability to attract new investment. Will Canadian governments respond? Will we see more migration of investment out of Canada into the US?
4. Capacity constraints in manufacturing. 2017 may have been a good year for Canadian manufacturing, but many businesses are running at close to full capacity, leaving very little room for growth. Will 2018 be the year we finally see investment in new manufacturing facilities in Canada? Or will output growth begin to stagnate?
5. Government fiscal sustainability. Persistent budget deficits federally and in many provinces, are not a problem as long as they are relatively small, temporary, and counter-cyclical. Deficits outside Alberta and Newfoundland are modest, but economic growth will be slower and interest rates will be higher. Is there a path to fiscal balance?

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