After exhibiting the third strongest economic performance (+2.3%) in the country after British Columbia and Ontario during 2015, the Manitoba economy hit a speed bump early in 2016.
Based on the available data, this softening in overall demand is mainly due to a weakening in foreign sales to the U.S., the market for 69% of the province's exports.
Despite stronger sales of transportation equipment (i.e. buses and public transportation vehicles) and a 30% increase in sales of canola oil, exports to the U.S. were down by 1% y/y through June largely on account of a 30% drop in sales of crude petroleum.
Manitoba's exports to countries other than the U.S. rose by 2% year to date in 2016 mainly due to stronger foreign sales to China (+12%) and Japan (+23%). The two commodities which have contributed the most to the strength in exports to those two countries were canola oil (+19%) and pork products (+23%).
Looking forward, while the most recent reports point to strong crop yields, the impact of weaker commodity prices suggests that agricultural exports will make a smaller contribution to growth this year and next than they did in 2015.
While foreign trade has exerted a drag on Manitoba's economy thus far in 2016, its impact has been more than offset by the relative strength of the key components of domestic spending.
First, fuelled by low interest rates, a solid year-to-date gain in full-time employment and a 3.1% ytd increase in average weekly earnings, consumer spending — reflected by retail sales — is up by 6.8% year to date compared to a -0.3% ytd decline during the first five months of 2015.
Second, against a background of improving affordability recently reported by RBC, the above-noted increase in full-time hiring and an unprecedented net inflow of international migrants, home sales are up by 6.4% in the first seven months of 2016, well ahead of the 1% y/y increase they posted in the first seven months of 2015. Despite the very solid gain in home sales year to date through July, housing starts in the province have retreated by 8% largely on account of a 22% ytd drop in starts of multiple units.
However, given the strong fundamentals and the fact that the inventory of existing homes for sale hit a three year low of 3.7 months in July, we expect that new residential construction will pick up speed during the remainder of this year and into 2017.
Given the sharp retreat in commodity prices and the concomitant deterioration in investor confidence over the past two years, it is not surprising that, according to Statistics Canada's most recent Capital and Repair Expenditure (CAPEX) Survey, total capital spending is projected to rise by a relatively modest 3.4% in 2016 after posting gains of 13.3% and 12.2% in 2014 and 2015.
According to Statistics Canada, a projected 8% drop in private sector spending will be offset by a 14.4% rise in public sector capital spending stemming primarily from the construction phase of Manitoba's Keeyask Generating Station and the associated Bipole III Transmission Line.
Next year, although the prospects for investment are overshadowed by uncertainty about the outlook for the North American economy, non-res commercial construction should get a boost from the True North Square project and the recently announced Sky City Condo project while the construction of processing buildings at the Vale Mine will give a boost to industrial construction.
Given this outlook for sustained domestic demand plus a modest improvement in net exports, we expect the Manitoba economy to expand by 2.0% to 2.5% in 2016 and 2017, about the same pace that it expanded in 2015.