The Canadian economy improved during the first half of 2017, thanks to higher oil prices and a stronger Canadian dollar.
But that likely won’t continue, says Luc de la Durantaye, head of asset allocation and currency management at CIBC Asset Management.
“We’ve been surprised by the strength of the Canadian economy of late but we think, going forward, it’ll be difficult to maintain,” he explains. “We have to think the energy rebound is almost over and, with oil prices remaining around $45 to $50 [a barrel], Canada will not get as much momentum in the second half of the year.” (Just think of oil’s dip in June and how that has affected commodity indexes.)
Another challenge for Canada is the amount of debt held by Canadian consumers, says de la Durantaye, who manages the Renaissance Optimal Inflation Opportunities Portfolio. This is especially concerning following the Bank of Canada’s key rate increase on July 12 to 0.75%, and the subsequent hike in mortgage rates by Canada’s big banks.
What’s more, says de la Durantaye, “We’re not as optimistic in the U.S. economy, so exports to the U.S. are not necessarily expected to be strong in the second half of the year. We’re a bit more prudent in terms of momentum to the Canadian economy and monetary policy in the second half [of 2017].”
Other factors influencing his less optimistic outlook are “the recent backup in Canadian bond yields combined with the rapid appreciation of the Canadian dollar. That, essentially, is an important component of financial conditions in Canada; they’ve tightened quite rapidly in a short period of time,” says de la Durantaye.
He expects the BoC won’t like that trend, meaning it could moderate its enthusiasm about growth prospects for Canada as 2018 approaches. Otherwise, yields will continue to backup and the Canadian dollar will continue to strengthen, “which will by default nip the recovery in the bud. We expect a bit more prudence and less momentum.”
De la Durantaye isn’t giving up, despite his modest outlook.
He says, “We think Canadian bonds could be a decent investment in the short term. We’re starting to see better value in Canadian bonds because they’ve backed up so much and because we don’t think the economic recovery will be as strong.”
However, he recommends against investing in Canadian currency. “We don’t think the Canadian dollar could continue the speed of its appreciation that we’ve seen in the early months of the summer, and so we would be a bit more careful about [it],” de la Durantaye explains.
Instead, he’s looking at opportunities overseas. “Europe looks brighter and a number of emerging markets also look brighter than the Canadian economy at the moment.”