Export Development Canada vice president and chief economist Peter Hall took at look at the economic outlook for Canada, the United States and the world at the CanaData East construction forecast conference, held on Sept. 21 in Toronto.
Hall began by saying he's "very high on the U.S. economy," but said it's a difficult time to forecast given the amount of turbulence and cynicism over the performance of the economy over the last decade.
Hall said he understood the frustration, since forecasting has resulted in a multiplicity of views and no real conclusions.
"Businesses have had to feel this out on their own, with no real answers," he said.
Hall said it's essential that when a forecaster says "I'll tell you what'll happen in the future," if they are worthy of attention you should know two things; where they're coming from and the current situation. The same applies to the economy, he said.
Hall said international trade intensity has accelerated from medium growth in the 1970s and 80s to
accelerated growth beginning in the 1990s, and was directly related to free trade agreements starting with the United States in Canada free trade agreements, such as NAFTA.
Gradually the rest of the world got on board, and "the numbers are very clear, this helped our economy and prosperity," Hall said.
These agreements brought about one of the longest growth cycles in our time. Normally a recession occurs within 10 years, but this cycle was 16 years of growth. The tech bubble, Hall said, was a blip compared to the overall economy.
But "any time an economist says 'it's different this time', your antenna should go way up," Hall said.
Once that attitude takes hold, people become prone to risk and it ended in excessive activity. "That is a bubble," he said.
"Whenever there's excess, there's going to be a correction," Hall added.
The reason we recovered, he said, is that there was a "cavalcade" of global stimulus, which got the economy back on its feet. But since then, there has been a "slow growth odyssey". This has been a necessary stage, he said, because "you have to work those excesses down." The last seven years have been a period of burning off that excess, and the business cycle dictates that the next phase we face is the recovery.
Hall said he believes we are on the threshold of this recovery, and pointed to a very low unemployment rate in the United States. He said over the last cycle, the unemployment rate has gone down but so has participation in the labour force. Three groups of people were left behind in the Great Recession of 2008, Hall said. Those who were close to retirement watched their savings dwindle and once retired, weren't going to rejoin the work force. Those in mid-career also suffered, and new graduates had to wait seven years for a meaningful job.
Hall explained that his is a driver of discontent in the United States, leading to the political shift we now see there and in western Europe.
The question is, will this turn around? Hall said, and pointed out that not all economies can "pull the rest of the world along." Western Europe and the United States can, but China and India's economics are not yet mature enough to push the world economy forward.
But the participation rate amongst millennials has recently turned around, which means millennials are buying their first houses, cars, and maybe having their first children. Not having these people in the economy takes away a "dynamo of demand," but bringing them back with directly effect demand in a big way, he said.
The numbers should be bigger for housing, Hall said, but there's as of yet not enough supply to meet the demand.
This all effects Canada because U.S. housing activity is a reliable indicator of other economic trends, and if this rise in U.S. housing demand is accurate, with the re-entry of millennials in the marketplace, there will be a concurrent rise in the rest of the economy.
Purchasing managers inside firms are more optimistic about the next six months, Hall said, and business investment activity is also reflecting this growth. The U.S. auto sector is at 114 per cent productivity currently, which benefits central Canada.
Industrial vacancy rates in the United States are also quite low, which Hall said is another indicator that America is on the verge of increased industrial and commercial construction activity.
Western Europe is a year behind, but it is a bigger economy than the United States, and is "heating up."
The CITA trade agreement will also open up European construction projects to Canada, he said.
But while things are firing up, the current politics have "run out of patience." Existential arguments are happening over globalization, and Hall warned scrapping NAFTA could throw Canada into a worse recession than 2008.
"This is something that will hurt not only Canada and Mexico, but also the United States," Hall said.
1.7 million U.S. jobs depend on exports to Mexico, and 1.8 million depend on exports to Canada. 32 of 50 states have Canada as their primary trading partner. Costs for goods will rise for Americans, and no action happens without a reaction. Getting rid of trade agreements will result in trade wars, and technology has accelerated globalization.
China isn't going away either, Hall said. If China can become a consumer economy, and can lower its saving rate, it will accelerate the world economy further. And "India is the next China," he added.
What all this means for Canada, he said, is that since we had come out of 2008 somewhat unscathed, stimulus ended up accelerating the Canadian housing market even further. But though our domestic economy is softening, trade is increasing. Construction will see less residential activity, but Hall said acceleration will occur in the industrial and metals sector. Oil and gas prices and non-energy commodity prices are not growing quickly, but they are growing.
Because of the weakness of our domestic market, we can't raise interest rates like the United States, so our interest rate increases will be slow and steady. The Canadian dollar will not act as an inhibitor either, and will stay in the 70 cent to 80 cent range, he added.