At the best of times it is not easy to forecast how an economy will likely perform even in the short term, let alone the long term. This is so true when trying to frame the outlook for Canada in 2018. No one segment of the economy can be said to operate without some caveats. The road ahead is far from clear.

The Bank of Canada’s Monetary Policy Report for April lays out the basis for its rate setting policy decisions and serves as a guide to the perplexed on the direction of various segments of the Canadian economy. I say “perplexed” because there are so many moving parts to consider and, when taken as a whole, there are more questions than answers as to the future.

The best place to start is to look at how each segment contributes to economic growth. Figure 1 compares growth projection made in April with the projections made in March (in parentheses)

Figure 1 Contributions to GDP 

• Monetary Policy Review, April 2018. Numbers in parentheses are from the projection in the previous report, March 2018.

The key takeaway from this table is the composition of growth for 2018 is expected to shift significantly compared to 2017. Moreover, the Bank has made some significant adjustments in that composition just in the last month. Consumption is downgraded from contributing 1.6 to 1.5 percentage points. Housing is also downgraded and expected to make no contribution to growth. Business fixed investment’s contribution remains unchanged.  With exports making no contribution, the trade sector continues to be a drag on the economy. Overall, GDP has been downgraded from an earlier estimated growth of 2.2 per cent to 2.0 per cent for 2018.

What is behind the downgrading of future growth?  As the evidence mounts of a slowdown in housing sales and declines in average home prices in the large metropolitan centres, it is not likely that housing will not contribute positively to GDP. Exports, once considered to be a major engine of growth, are expected to make no net contribution. Business investment remains a puzzle. While the Bank does anticipate investment to contribute to overall growth, it does recognize that there are some serious headwinds when it states that:

Despite strengthening global demand, growth of business investment in export-oriented goods industries is anticipated to be restrained by elevated uncertainty around trade policy, regulatory concerns and incentives to shift investment to the United States following the US tax reform.[1]

It singles out the energy sector, which accounts for roughly 20 per cent of business investment in Canada, when it forecasts:

That investment will decrease in 2018 and remain roughly flat thereafter. Investment in new projects is being held back by reduced competitiveness resulting from regulatory and US policy changes.[2]

The last part of the forecast raises more questions about capacity utilization. The Bank relies on its measure of potential GDP to gauge just how much labour and business investment is available to allow the economy to expand without generating inflation. We just learned that investment is expected to expand, yet there is so much uncertainty emanating from U.S. trade policies. Potential growth is also determined by the trends in labour force growth which will continue to slow, due to an aging population. So, we have uncertainty on the business investment front and we have certainty that the labour force will slow, these in combination will reduce potential growth.

[1] Monetary Policy Report , April 2018

[1] Ibid.