Headwinds

The United States, Canada and Mexico formally signed the new USMCA* trade deal in a low key ceremony at the G20 in Buenos Aires this morning.  However, with a Democrat majority set to take over the House of Representatives in little more than a month, uncertainty over trade within North America will persist for many more months.  Meanwhile, there are growing indications that the Canadian economy faces a prolonged period of sluggish growth.

This morning Statistics Canada reported that real GDP growth slowed to a 2.0 percent annualized rate in Q3 from 2.9 percent in the prior quarter.  Both business fixed investment and residential investment declined in the quarter.  While it is possible that the slack in business investment partly reflected uncertainty over the trade negotiations, these numbers suggest that the economy may not prove resilient in the face of rising interest rates. Household consumption was virtually unchanged in the quarter, while -- somewhat perversely, given the trade uncertainties -- goods trade provided a boost to the overall growth rate.

The quarter ended on a weak note, with StatsCan reporting that GDP fell 0.1 percent month-on-month in September.  This virtually locks in a weak final quarter for 2018, and there are few reasons to be optimistic that growth will pick up significantly in 2019.

This week's announcement that General Motors will be closing its venerable Oshawa assembly plant in 2019, as part of its global restructuring, has produced an outpouring of doom and gloom in Ontario.  The woe is arguably overdone.  About 2500 salaried workers will lose their jobs, which is obviously devastating for the families involved, but recall that before the original NAFTA replaced the old Auto Pact, employment at the plant was as much as ten times greater than it is now.  This week's announcement is the last, and statistically the smallest, of many restructurings that have hit in Oshawa over the past two decades.

Employers all across the country are fretting over a shortage of skilled workers, so the economy should easily absorb those Oshawa workers that do not choose to retire. There may be a short-term impact on consumer sentiment, but unless there are more such announcements to come, the macroeconomic effects should be relatively minor. 

Of much more concern is the collapse in oil prices.  The global decline in the price of crude has raised concerns over the outlook for the world economy, but the decline in prices received by producers in Alberta has been much more severe.  With all pipeline development essentially halted by legal action,  rail capacity fully utilized and demand for oil sands crude in the US steadily eroding, Alberta crude has been trading at ever-widening discounts to the WTI benchmark. In some recent trading sessions, Alberta crude has been changing hands at as little as US$ 10/bbl.  Wells are being abandoned and workers are losing their jobs.  The daily cost to the Canadian economy has been estimated as high as C$ 80 million.

There is no relief in sight.  The Alberta government is scrambling to purchase additional railcars in order to allow more crude to be shipped by rail, but this will take time.  Meanwhile, it is being projected that the US will become a net exporter of crude some time next year, further undercutting Canada's export prospects.  Unless a way can be found to ship Alberta oil to supplant imports in eastern Canadian refineries -- and that pipeline project is stalled indefinitely  -- or to ship it to tidewater for export to Asia -- likewise stalled -- the outlook for the sector is undeniably grim.

Last but not least, how long can the US economy's sugar high, created by the Trump administration's tax cuts, continue?  Official data show that US GDP growth in Q3, at 3.5 percent, was almost twice the pace seen in Canada.  However, the cautious tone of this week's remarks from Chairman Jerome Powell suggest that the Fed may be starting to trim its expectations for future growth.  All in all, it seems likely that the Bank of Canada will have little reason to raise rates any time soon -- and it may not be too long before we start wondering whether it has accumulated enough ammunition to fend off the next downturn. 

* Stamping its little foot, Canada has announced that it will officially refer to the new deal as CUSMA. That's an odd choice in that it doesn't actually work in Canada's second official language, French.  In the meantime, Mexico is calling it either TMEC or MUSCA, which happens to be the Latin term for a fly.  And a quick Google search reveals that "cusma" is a Peruvian Spanish name for a sleeveless shirt.