Cooling in Canadian growth comes at time of risks to economy from U.S. trade and tax policy

The Conference Board of Canada’s Chief Economist Craig Alexander believes the Canadian economic growth cooled off in the second half of 2017 and “softened” heading into this year, which could compound the risks created by US trade and tax policy, according to a press release.

The pace of economic growth in 2018 will likely struggle to achieve two per cent and the pace of job creation is expected to be modest.

Canada experienced strong economic growth in 2017 for the year as a whole, but the pace of expansion slowed considerably in the second half.

Real GDP grew at an annualized pace of 1.7 per cent in the fourth quarter of 2017, a result below market expectations for a gain of 2.0 per cent and well below the 2.5 per cent the Bank of Canada forecast in the January Monetary Policy Report.

Meanwhile, the Canadian economy faces future downside risks from U.S. trade protectionism, difficult NAFTA trade talks, and competitive challenges from lower U.S. corporate tax rates. These factors are likely to make the Bank of Canada cautious in delivering further rate hikes.

“Canada posted three per cent growth in 2017, the strongest in the G7. However, the pace of expansion lost momentum in the second half of the year and entered 2018 on a soft note,” said Alexander.

“This cooling in Canadian growth comes at a time when there are a host of downside risks to the domestic economy from abroad, particularly U.S. trade and tax policy.”

It is encouraging that business investment delivered a strong increase of 9.5 per cent in the fourth quarter, with broad-based gains in machinery and equipment, residential and non-residential investment, according to Alexander.

However, the details raise questions about the sustainability of the gains. For example, some of the strength in real estate activity reflected increased resale activity in advance of new mortgage regulations.

Meanwhile, machinery and equipment rose primarily because of outlays on aircraft and transportation equipment, areas that tend to be very volatile. Real exports increased by 3.0 per cent, but this fell well short of a 6.3 per cent increase in imports.