Economic Outlook Q4

canada—mid-cycle adjustment on the horizon

After a relatively flat reading for real GDP growth in Q4 2019, we are expecting the Canadian economy to rebound later into 2020. We are forecasting Canadian real GDP growth of 1.4% and 1.9% for 2020 and 2021, respectively.

Going into the new year, Canadian economic data was fairly positive. The labour market boasted positive numbers adding 27,300 and 34,500 jobs in December and January, respectively. Despite pipeline curtailment, exports were up by 1.9% in December largely driven by crude-by-rail. On January 15, Trump signed a “Phase-One” trade deal with China and noted a “Phase-Two” provision will be drafted in the coming months.

After leaving rates unchanged throughout Q4, the Bank of Canada is beginning to sound more dovish. The BoC is leaving the door open for another rate cut this year, which we believe will take place in Q2. While the Canadian economy is fairly robust, another mid-cycle adjustment may be appropriate.

The main reason for a rate cut would be to drive foreign investment. While the price of a loonie to a dollar may seem cheap, Canadian currency appreciation against foreign exporters to the US market caused downward pressure on Canada’s capital and current accounts. In an ultra-low interest rate environment, the currency is the BoC’s main channel of influence.

With exports already on the rebound, driven by the easing of global trade tensions and crude-by-rail, we believe foreign investment can be further facilitated with a rate cut in Q2. While the decision relies on economic data, we are forecasting indicators to lean towards easing policy. For example, despite the recent strong employment figures, we believe that employment growth has been a little stronger than it should have been given other economic data. As such, we expect a slight uptick in the unemployment rate, which would see investors pricing in a greater probability of a rate cut.

Source: CIBC World Markets

British Columbia - Leading the Canadian Economy Among a sluggish backdrop, British Columbia is emerging as a bright spot in the Canadian economy. We believe the BC economy, while slightly overweight in trade and manufacturing, has upheld resilience through increased diversification. We expect BC to lead Canada in 2020 and 2021 with 2.0% and 2.4% real GDP, respectively.

We would like to reiterate, from our last publication, the spillover from a slowing national and global economy continues to weigh on BC’s forestry sector, manufacturing sector and consumer spending. The unemployment rate has been trending higher since July 2019 after an

all-time low of 4.7% in 2018. We are expecting this trend to continue into 2020 with a small uptick in unemployment followed by a reversal in 2021.

On a positive note, diversification has underpinned BC’s economy. Compared to 2019, growth should pick up over the next few years without any serious downturn. In spite of the dimmer areas of BC’s economy, capital expenditures, population growth and residential real estate all outweigh the negative.

Capital expenditures on large engineering projects such as the Trans Mountain expansion, BC Hydro Site C and the Pattullo Bridge will not only increase access to resources, but create several jobs in the process. Furthermore, continued diversification into industries such as film and television, tourism, technology, scientific and technical services are increasing net in-migration to the province. Along with increased demand and construction in residential real estate, population growth is causing a rebound in the real estate market.

As a final word, we would like to note that we expect the partial resolution of the US-China trade conflict to encourage a rebound in BC’s export sector by the end of Q1. Consistent with our Canadian growth outlook, the BC economy is poised to rebound and lead our nation’s growth in 2020 and 2021. Increases in the population, overall construction and diversified segments have upheld the economy and will continue to grow in coming years. •

JAMES HOBSON, CFA, PM, First Vice-President, Portfolio Manager, Investment Advistor & Chairman’s Council Member 403-260-0574 james.hobson@cibc.ca

`This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2020. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. James Hobson and Charet Chahal are Investment Advisors with CIBC Wood Gundy in Calgary The views of James Hobson and Charet Chahal do not necessarily reflect those of CIBC World Markets Inc. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.

JAMES HOBSON, CFA With over 10 years of experience at CIBC, James focuses on identifying major market themes, analyzing equity and fixed income securities, and monitoring client portfolios to ensure investment policy compliance. Among the numerous charities he assists, James is a long-time supporter and donor for the Kids Cancer Care Foundation of Alberta.

CHARET CHAHAL, CFA Prior to joining CIBC Wood Gundy, Charet worked in the oil and gas sector, developing a wealth of experience in energy markets. Charet also managed and led a start-up business venture to be listed on the public exchange. Charet is an avid supporter of the Calgary Children’s Hospital.