This year, the Canadian economy was lifted by a stronger energy sector and consumer spending that was boosted by federal policy, says Patrick O’Toole, vice-president of global fixed income at CIBC Asset Management.
He concedes he was below consensus in his forecast for 2017, when the Canadian economy grew by 4% over the first half of the year. “The Canadian economy did much better than we [and] consensus expected; much better than the Bank of Canada expected,” he says. (For more on interest rates and the Bank of Canada’s expectations, read Longer Low for Bonds Yields.)
“A couple of things went right, and there’s some things we missed and we should have been a little sharper on,” says O’Toole, who co-manages the Renaissance Canadian Bond Fund, an underlying fund in the Renaissance Optimal Income Portfolios.
The first was the energy sector, which recovered after a dismal 2016 that saw depressed oil prices and calamitous fires in Fort McMurray, Alta. Says O’Toole: “A sector that accounts for about 10% of the economy has been responsible for about 40% of the growth in the last 12 months.”
As well, capital expenditure budgets in that sector were higher than expected in 2017 as oil prices levelled off, but O’Toole says he doesn’t see a repeat performance in 2018.
“Oil prices are fairly stable now,” he explains. “We don’t see those businesses looking to increase their cap-ex budgets at the same level that they did in the past 12 months. So it should be a much more muted business spending cycle in the next 12-month period.”
Retail was the other major economic driver in 2017, and O’Toole attributes the sector’s performance in part to the federal government’s July 2016 increase to the child benefit program.
“Canadians were slow to realize that was a permanent addition to their free money, if you will—their after-tax money,” he says. “They started to spend that money a little more freely this year so we’ve had a good boost in retail sales.”
Consumers have now digested that change, he says. On Oct. 24, the federal Liberals’ fall economic update included a plan to index the child benefit program to the cost of living as of July 2018, two years earlier than originally promised. But O’Toole doesn’t expect the program to have another major impact on spending.
For the next 12 months, O’Toole predicts growth of around 2%, which is in line with the forecast from the Bank of Canada on Oct. 25.
After two consecutive rate hikes, the Bank opted to maintain the overnight rate at 1%, citing uncertainty around NAFTA renegotiations and its expectation that the Canadian dollar’s strength would slow inflation. The Bank also projected inflation would rise to 2% in the second half of 2018.