Inking a three-party trade deal with the United States and Mexico won’t be a silver bullet for a soon-to-be slower Canadian economy, according to new research from CIBC Capital Markets.
“Even if, as we expect, a deal is reached, that won’t be a done deal for robust Canadian growth,” senior economist Royce Mendes wrote on Thursday. “Other fundamentals will see growth in the economy tailing off.”
Mendes is calling for the pace of economic expansion to taper to 1.8 per cent in 2019 and 1.3 per cent in 2020.
Canada has been locked in a game of Deal or No Deal with its North American Free Trade Agreement partners for more than a year. Foreign Affairs Minister Chrystia Freeland’s delegation returned to the negotiating table on Wednesday after a four-day break.
Speaking to an Edmonton radio station on Wednesday, Prime Minister Justin Trudeau echoed his position that the Chapter 19 dispute resolution, and exemptions for Canadian cultural industries, are among the “red lines that Canadians will simply will not except.”
The latest data from Statistics Canada underscores the importance of trade with the U.S. Canada’s trade surplus with the U.S. grew to the biggest in a decade. Exports, the vast majority of which go south of the border, saw the biggest annualized quarterly gain since 2014.
However, it’s not the undoing of U.S. trade relations behind Mendes’ increasingly pessimistic outlook for Canada’s economy.
“The upcoming slowdown is . . . a byproduct of past success. The economy has come a long way since the depths of the financial crisis and subsequent oil price crash, and is now bumping against its non-inflationary speed limit,” he said.
Mendes points to rising interest rates upping the cost of mortgage debt, noting that Canadians are on track to pay roughly $8 billion more than today.
That, coupled with rising housing costs in many areas, could make a meaningful dent in discretionary spending.
“Canadian housing, where affordability is already stretched in many places, will become even more costly for many buyers,” Mendes said. “Both housing and consumption will no longer be able to carry the Canadian economy on their backs come 2020.”
Adding to the economic slowdown, Mendes predicts foreign investment in Canada will be whittled away by a more favourable corporate tax climate stateside. That’s on top of mounting concern that Canadian businesses will be caught in a protracted spat with their biggest foreign customer.
“Even with NAFTA in place, the U.S. has become much more aggressive in imposing tariffs on Canadian exports, a red flag for capital investments north of the border,” he said. “Last quarter’s export surge was nothing more than a flash in the pan, in part due to U.S. buyers front-running their own country’s tariffs.”