Losing NAFTA would hurt exports, but more Trump tariffs could make things much worse

The Conference Board of Canada’s latest Canadian Outlook Bulletin calls for the national economy to grow by 1.8 per cent in 2018–19 in the wake of a 3 per cent gain last year, according to a press release.

“An easing pace of consumer spending, potential breakup of NAFTA and daily threats of new tariffs across a wide range of goods, including in the automotive sector, will weigh on Canada’s economic growth prospects,” said Matthew Stewart, director, national forecast.

Canada’s export sector will remain on shaky ground over the near term as rising protectionist measures from the United States and continued uncertainty surrounding the outcome of the NAFTA renegotiations dominate and undermine the sector’s outlook.

This is particularly true for the heavily challenged non-energy sector, which has already witnessed several industries being subjected to tariffs in recent months, according to Stewart.

Meanwhile, the prospects of a NAFTA dissolution remain high.

A collapse in the 24-year-old trade agreement represents a major downside risk to the Canadian economy.

The Conference Board expects that the demise of NAFTA would subtract about 0.5 per cent from its growth projections under an assumption that tariffs remain low, in line with World Trade Organization rules.

But Canada could be hit much harder given recent threats and tariffs already applied on a wide range of imports by the United States.

Overall, export volumes are forecast to increase by a modest 1.4 per cent this year.

This year and next, consumer spending growth will ease as households reduce the pace of borrowing in the face of higher interest rates and slower job growth. Lower home prices will also impact spending, as households will have less equity buildt in their homes with which to borrow against.

On a brighter note for households, the unemployment rate remains at a record low and job vacancy rates continue to edge up, translating into strong wage growth. Average weekly wages are expected to rise by 3.3 per cent in 2018, double last year’s pace.

On a more positive note, Canadian companies made substantial increases to plant and equipment investment in the first quarter of 2018.

The increase in business investment was long overdue and will help ease record high capacity utilization across many sectors of the Canadian economy.

Current demand and capacity conditions would typically result in strong growth in business investment but many firms are reluctant to ramp up spending due to concerns about the future of NAFTA, access to the U.S. market and the prospects of a global trade war.