Canada's Resilient Economy

In recent months, many economists have become increasingly pessimistic about the prospects for the Canadian economy in 2015, due in large part to the sharp fall in oil prices in recent months.  However, we expect the Canadian economy to perform relatively well over the course of the current year as a number of factors will combine to offset the decline in the price of oil and many of Canada’s other key natural resource exports.  In fact, we expect Canada to continue to outperform most of the world’s other leading developed economies in 2015 and in the following years.

While economic growth in Canada slowed in the fourth quarter of 2014, the 2.4% annualized GDP growth rate recorded in that period exceeded the expectations of most economists and was a higher rate of growth than that of nearly all other developed economies around the world in the fourth quarter of last year.  This growth in Canada was propelled by an increase in consumer spending at home and higher levels of inventory building by Canadian businesses in late 2014.  Moreover, the impact of the sharp fall in oil prices did not have a significant impact on most sectors of the Canadian economy in the latter part of last year, although this is expected to change in the coming months.

Since 2001, the Canadian economy has grown by an average of 2.0% per year.  While this may not sound like much, it is more impressive when placed next to the average economic growth rates recorded in the United States (1.8%), Britain (1.5%) or the Eurozone (0.9%) during the past 14 years.  This growth was driven by a combination of the increase in demand for Canadian natural resources in Asia and the United States and the continued expansion of Canada’s domestic market.  Moreover, Canada’s financial system proved to be much stronger than that of most of its counterparts in the United States and Europe during the financial crisis, enabling Canada’s financial sector to avoid the major losses and disruptions experienced in most other developed economies.

Looking ahead, we are forecasting that the Canadian economy will continue to expand at a solid pace in the coming years, with an expected slowdown in the first half of 2015 to be followed by strong growth of around 3% by late 2015 and early 2016.  On the downside, the price of oil is forecast to remain low over the near-term and this will reduce investment in Canada’s oil sands industry and reduce export revenues in 2015.  Furthermore, the growth in Chinese demand for Canadian natural resources will slow as China’s economy continues its gradual slowdown in the years ahead.  However, these factors will be offset by a strong increase in export demand in the United States as the US economy picks up steam in the coming years.  Moreover, Canada’s domestic market will continue to grow in the coming years, fuelled by favorable demographic conditions and an increase in consumer spending levels.  As a result, Canada will continue to outperform most of its developed economy peers in terms of economic growth in the coming years, despite fears of a slowdown.