On the surface, the Canadian economy seems to be doing well. The country’s job market is on track for one of its best years ever and the economy is improving, albeit at a snail’s pace. Still, there is growing consensus that the Canadian economy will slow in 2020 as a result of the global manufacturing slowdown, or as some suggest, recession.
Hasn’t Canadian GDP Growth Been Strong?
According to one economic report, the Canadian economy is going to be choppy in 2020 as it faces headwinds from the global manufacturing slowdown. This could result in the Bank of Canada lowering its key lending rate to help boost economic growth. How effective that will be is hotly debated.
Why would the Canadian economy be rocky in 2020 if it’s reporting solid gross domestic product (GDP) growth? It’s a matter of interpretation.
Since 2006, the Canadian economy has been range-bound, between 0% and 4%. In the second quarter of 2019, Canada’s economy advanced 3.7% on an annualized basis, but that growth is expected to be short-lived.
Canada’s real GDP (a less volatile year-over-year measure) shows the country’s economic growth has been in decline since June 2017. The country’s real GDP averaged just 1.5% in April, May, and June of 2019. In July, real GDP was flat, and in August the Canadian economy eked out a 0.1% gain.
Is Demand for Canadian Commodities Up or Down?
Global manufacturing giants like Germany, the world’s fourth largest economy, and the U.S. are in a manufacturing recession. China, the world’s second largest economy, is reporting its slowest GDP growth in years.
Canada is not an economic island and the global manufacturing slowdown, which was kick-started by the U.S/China trade war is starting to undermine the economy.
At 10%, the GDP of Canada’s manufacturing sector is about the same size as the resource extraction (7.8%) and agricultural sectors (2.1%) combined. How are these sectors performing?
A whopping 90% of Canada’s crude oil is shipped to the U.S., but because of plunging oil prices, the production and export of crude has been in free fall since May 2018. Agricultural exports are also down. This suggests that either demand for Canadian resources is in decline or buyers are looking elsewhere. It appears as if it’s both.
Demand for Canadian oil started to fall in 2018, right after President Trump implemented the first round of U.S. tariffs against China. Because of innovative fracking techniques, the U.S. also flooded the market with its crude. As a result, Canadian oil and gas drilling is projected to decline by 10% in 2020.
What about agriculture? Canada exports half of its beef, 70% of soybeans, 70% of pork, 75% of what, and 90% of its canola. On top of that, 90% of Canadian farmers rely on exports as does 40% of the country’s food processing sector.
China recently lifted its month’s long ban on Canadian beef and pork, which will help, but canola shipments are still banned. Moreover, a slowing global economy will put another unwanted dent in Canadian agricultural exports.
Those headwinds are hurting the Canadian economy. And it’s expected to get worse in 2020.
All of these factors will hurt the price of Canadian commodities even further over the coming quarters. The slowdown should also have a negative impact on Canada’s manufacturing industry and Bay Street.
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