Economic growth in Canada is shifting down a gear. This is a healthy occurrence, given that the economy has little domestic slack, as evidenced by the unemployment rate being at a nearly four-decade low and very high levels of capacity utilization. Softening economic growth will also reflect a shift in the main drivers of expansion. Domestic demand growth is poised to diminish because consumers and real estate can no longer drive growth as they have in the past.

This means that exports and business investment will be more important contributors to economic growth. The tentative free trade deal between the United States, Mexico, and Canada, called the USMCA, lifts a key cloud of uncertainty that posed a downside risk to the outlook and it should help boost exports and investment.

However, the transition in economic drivers is unlikely to go smoothly. With global and US economic growth likely peaking this year, weaker demand growth and potentially lower commodity prices are expected to be a headwind on exports over the next few years. Moreover, businesses are expected to remain cautious in their capital spending. Accordingly, after growing a robust 3.0 percent in 2017, the pace of economic growth in Canada is projected to slow to slightly below 2.0 percent in 2019 and drop to 1.4 percent in 2020.

This publication was released by our US firm.

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