OECD Economic Outlook November 2019 Country Note, Canada

 97

Canada The economy will go through a period of subdued growth. A slowdown in external trade and ongoing trade policy uncertainty are weakening exports and damping business investment. The labour market has been strong, supporting incomes, but employment growth will slow. The unemployment rate will stop falling, but remain at a low level.

The Bank of Canada should reduce rates modestly in the coming quarters to support demand. This will help keep inflation near the mid-point of the target band. Modest structural fiscal easing will support the economy.

Risks remain in the housing market, which shows signs of a rebound after a period of stabilisation that was helped by macroprudential measures. The supply of affordable housing should be increased and social housing should be better maintained and targeted.

Economic growth has slowed Greater global trade policy uncertainty and lower growth in trading partners have slowed exports.

Mandatory oil production cuts in Alberta further dented export growth but have now been eased, triggering a temporary bounce back in exports. Domestic demand remains weak. Business investment has declined, due to cuts in the oil and gas sector and heightened uncertainty. Companies’ investment intentions for machinery and equipment have been volatile. Residential investment, on the other hand, has picked up in light of the resumption of house price growth.

Canada 1 The global slowdown has weighed on exports Y-o-y % changes 10

Exports, volume

Investment has subsided and investment intentions have been volatile Y-o-y % changes ← Business investment 10

Export market

% balance 40

Investment intentions in machinery and equipment →

8

5

30

6

0

20

4

-5

10

2

-10

0

0

-15

-10

-2

2014

2015

2016

2017

2018

0

-20

2014

2015

2016

2017

2018

2019

-20

Source: OECD Economic Outlook 106 database and Bank of Canada.

StatLink 2 https://doi.org/10.1787/888934045107

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

98 

Canada: Demand, output and prices 2016

2017

Current prices CAD billion

Canada GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1

2 028.2 1 187.8 426.3 464.6 2 078.7 - 1.8 2 076.9 632.4 681.2 - 48.7

Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Consumer price index Core consumer price index2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) Current account balance (% of GDP)

2018

2019

2020

2021

Percentage changes, volume (2012 prices)

3.0 3.5 2.1 3.0 3.1 0.8 3.9 1.1 4.2 -1.1

1.9 2.1 2.9 1.2 2.0 -0.3 1.8 3.2 2.9 0.0

1.5 1.7 2.0 -2.4 0.9 0.1 1.0 2.5 0.7 0.6

1.6 1.5 1.4 1.0 1.4 -0.1 1.3 2.3 1.1 0.4

1.7 1.5 1.3 2.1 1.5 0.0 1.5 2.7 1.9 0.2

_ _

2.5 1.6

1.7 2.2

2.1 1.9

2.0 1.9

1.9 2.0

_ _ _ _ _ _

1.6 6.3 1.5 -0.3 94.3 -2.8

1.9 5.8 1.4 -0.4 93.7 -2.6

2.1 5.6 1.6 -0.6 95.5 -1.6

2.0 5.8 1.9 -0.5 95.2 -1.1

2.0 5.8 2.1 -0.3 94.7 -0.8

1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934046209

Canada 2 The labour market has tightened % of labour force 7.5

← Unemployment

Wage growth has risen

Y-o-y % changes 2.5

Y-o-y % changes 5

Employment →

Hourly wage¹ BoC's core measures²

7.0

2.0

6.5

1.5

6.0

1.0

4

Headline inflation

3 2 1 5.5

5.0

0.5

2014

2016

2018

0.0

0 0

2014

2016

2018

-1

1. Median of hourly wage growth measures from the Labour Force Survey, National Accounts, Productivity Accounts, and Survey of Employment, Payrolls and Hours.

2. Average of the Bank of Canada's three preferred core inflation measures (CPI-trim, median and common).

Source: OECD Economic Outlook 106 database; Refinitiv; and Bank of Canada.

StatLink 2 https://doi.org/10.1787/888934045126 OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

 99 Employment growth has increased markedly, along with strong rises in population and labour force participation. The unemployment rate has continued falling to record lows. Wage growth is gathering momentum. Consumer spending is nevertheless growing more slowly than income as highly indebted households are becoming more cautious and credit growth has slowed. Consumer price inflation increased over the year, only to recede recently, in part due to falling energy prices. The average of the Bank of Canada’s underlying inflation measures has been steady at around 2%. A clear majority of businesses now anticipate inflation to be in the lower half of the 1-3% medium-term target band over the next two years.

Policy should support the economy Notwithstanding slower growth and a deteriorating global economy, the Bank of Canada has kept the policy rate unchanged at 1.75% since late 2018. With projected continued weak growth, soft global trade and easing global financial conditions, the official rate is projected to be cut by the end of 2019 and once more in the first half of 2020, to 1.25%. Despite contractionary measures in Ontario’s 2020 budget and the Federal Budget for 2021, the overall general government fiscal stance is estimated to lend slight support to the economy, with the overall underlying primary surplus diminishing in the coming two years. The easing is appropriate given slower growth.

Housing activity has picked up, and house prices show signs of recovering on the back of robust population growth, a strong labour market and lower mortgage rates. This comes after the market stabilised from steep house price rises. Household indebtedness remains high by international standards, but households are expected to start deleveraging and household credit growth has slowed. As monetary policy is projected to ease, close attention needs to be paid to housing market developments. Macroprudential policy should be tightened again if needed. Furthermore, to make housing more affordable and shorten waiting lists for social housing, the supply of affordable housing should be increased and the stock of social housing should be better maintained and targeted.

Growth will remain subdued Heightened global uncertainty is set to persist for longer than previously expected and trade will remain weak. Business confidence and investment in Canada are projected to recover only gradually. Exports and imports will remain subdued. Private consumption will support growth, but households will remain reluctant to spend from their income due to uncertainty, a slowing labour market and deleveraging. The unemployment rate will remain low, inflation will stay close to the mid-point of the target range and wage growth will remain moderate.

A major domestic vulnerability remains the high indebtedness of households. A sharp economic slowdown would weigh on household incomes and could lead to lower consumption expenditure, and to weaker housing demand. On the other hand, were house prices to pick up more sharply, this could lead to a further build-up of imbalances. Another risk is that the United States-Mexico-Canada Agreement is not ratified or that access to the US market becomes less favourable. On the upside, in the event of an increase in oil prices, incomes would be boosted, resulting in higher economic growth.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019