Canada is a ‘northern star,’ outshining softer U.S. growth: Scotiabank

"At the moment, Canada is the Northern Star." - Scotiabank (Getty)

Canada’s economy is a “Northern Star” outshining lacklustre global performance, according to economists at Scotiabank who see the country’s growth outpacing the United States for the remainder of the year.

The bank released its Q3 Global Economic Outlook Report on Friday. The report, titled The Perils of Trumponomics, warns the U.S. economy is coming down from two years of “fiscally induced sugar highs” as U.S. President Donald Trump’s trade policies begin to weigh on economic activity.

Meanwhile, they say Canada is standing in sharp contrast to much of the rest of the world, with accelerating growth underpinned by strong domestic demand.

“Canadians appear to be, for the time being, largely insulated from the broader malaise facing the global economy as consumer and business confidence has improved sharply in recent quarters, owing to strong sales and job creation,” wrote the team of economists led by Scotiabank Economics senior vice president and chief economist Jean-François Perrault.

“At the moment, Canada is the Northern Star.”

Perrault points to job market gains that have outstripped those in 2018 by a wide margin. Average wage growth is running at 3.8 per cent year-over-year, he notes, well above inflation and two full percentage points higher than late last year. Hiring has benefited as well, with many firms running flat out to keep pace with demand.

“Canada-wide growth in unfilled order books are still near the fastest rates in five years and capacity utilization rates remaining at or above long-term averages,” Perrault and his peers wrote.

“With profit margins in Canadian industry a full two percentage points above their historical average, capacity constraints and the increased scarcity of labour are leading firms to increase capital spending, with outlays on machinery and equipment rising by almost 40 per cent quarter-over-quarter at a seasonally adjusted annual rate in Q1.”

Stateside, the Scotiabank Economics team sees growth continuing, but at a slower pace than previous years. They said the U.S. set a new record for the longest uninterrupted economic expansion in its recorded history this month, while predicting “below potential” quarterly GDP performance until the fourth quarter of 2020.

With Canadian inflation near the Bank of Canada’s two per cent target, the Scotiabank economists expect rates to remain on hold at current levels. They are calling for the U.S. Federal Reserve to cut its policy rate by 75 basis points this year to guard against downside risks.

The dominant risks to Scotiabank’s Canadian outlook lie beyond the nation’s borders, with the exception of a strengthening loonie. However, the bank is unclear how long the good times for Canada will last.

“While there are a number of factors suggesting that the growth rebound observed will persist through 2020, there is a risk that a divergence between Canadian and US outcomes may not last,” the economists wrote.

“Trump’s policies are having clear and tangible negative impacts on the U.S. and the broader global economy.”