2019 started on a sour note with financial markets deep in correction territory, after one of the worst Decembers on record for North American equities. The sell-off was not limited to stocks; cyclical commodities and other risk assets were also in sharp retreat. Money flooded into the safest of assets, lowering global bond yields despite a tightening bias in global monetary policy. Markets were convinced that a weakening world economy, increased protectionism, heightened political risks, and tighter monetary policy were running the risk of a global recession.

The business lesson from 2019 is important and instructive. In past quarterly outlook publications, we stressed that businesses should prepare for potential shifts in the economy but not let financial risks paralyze them. As such, firms should make key capital investments and hiring decisions in alignment with their long-term objectives, not the short-term market movements. They should plan for what to do if a recession occurs, but do not implement it until the high-frequency and leading economic data reveal that the cycle has turned. This is especially critical now since we are in the late stages of a business cycle and growth has slowed to a more modest pace. This leaves the economy more vulnerable to risks, which are currently plentiful and difficult to predict due to their highly political aspect.

Overall, our Canadian outlook has not materially changed from the last quarter, in light of the fact that the economy evolved in line with our prior forecast. We estimate that growth averaged 1.7 percent last year, slightly higher than the 1.6 percent predicted in our prior publication. But, the improvement is largely related to Statistics Canada revisions to prior data. Growth should accelerate towards 1.9 percent in 2020, as the benefit of lower borrowing costs outweighs the slightly stronger loonie, before gradually decelerating towards its potential rate of growth – which we estimate to be approximately 1.7 percent.

Download