Another Upbeat Take on Canada’s Economy

Following last week's optimistic forecast from Export Development Canada, the Organisation for Economic Co-operation and Development (OECD) offered a similarly upbeat take on Canada's growth prospects. In fact, the OECD has a rosier outlook for Canada's economy than many of the country's own policymakers and private-sector analysts.

As part of a semiannual update of its global forecasts, the Paris-based group, which helps foster greater economic ties among its 34 developed-world member countries, projected that the Canadian economy will grow 2.5 percent this year and 2.75 percent in 2015.

That's an improvement from its November forecasts of 2.3 percent and 2.6 percent, respectively. It's also higher than the Bank of Canada's (BoC) own forecasts, which call for the economy to expand this year by 2.3 percent, down from a previous estimate of 2.5 percent, and grow 2.5 percent next year. The consensus among private-sector economists matches the BoC's projections.

Also of note, the OECD expects Canada's economy will outpace the average growth among the group's member nations by a substantial three-tenths of a percentage point this year, though next year its performance will essentially be in line with the average.

In the short term, however, the OECD forecasts growth of just 0.5 percent for the first quarter, largely due to harsh winter weather, though the second quarter should reaccelerate to 2.4 percent.

"The United States and Canada are both also expected to experience an uneven pattern of growth in the near term, owing in part to the disruptive effect of repeated episodes of severe winter weather," the OECD observed.

Despite the "two steps forward, one step back" that's characterized the country's growth in recent quarters, the OECD sees Canada's economy experiencing a “desirable rebalancing” to exports and business investment, which is the ! same transition the BoC has long been touting.

The OECD believes exports will gain momentum due to several factors, including stronger foreign demand, the recent decline in the Canadian dollar, and continued growth in the energy sector. And business investment should strengthen as uncertainty about the global economy diminishes.

"Business investment should accelerate, boosting capacity and cost competitiveness. Consumption growth is likely to strengthen, while housing investment should decline toward a more sustainable level," the group's economists noted.

Growth in Canada, the US and the rest of the developed world should be boosted by "accommodative monetary policies, supportive financial conditions and a fading drag from fiscal consolidation."

Continuing the aforementioned theme of "two steps forward, one step back," after February's blockbuster performance, Canada's international merchandise trade for March fell short of expectations.

Merchandise exports declined 1.4 percent in March, to CAD42.7 billion, while imports edged up 0.4 percent, to CAD42.6 billion. As a result, Canada’s trade surplus narrowed substantially to CAD79 million from CAD847 million in February. The good news is that February's surplus was revised sharply higher, as it had been initially reported as CAD290 million.

Lower prices, particularly among energy products, were the main culprit for exports' lackluster showing, as prices fell 2 percent on a 0.7 percent increase in volume. This also reduced the dollar value of exports to the US, which declined 2.5 percent, to CAD32.2 billion.

As a result, Canada’s trade surplus with the US, which absorbs roughly three-quarters of the country's exports, narrowed to CAD3.8 billion from CAD4.9 billion in February. Nevertheless, exports to the US are still up 10.2 percent on a year-over-year basis.

Exports of energy products fell 7.9 percent, to CAD11.2 billion, following three consecutive months of s! ignifican! t increases. The dollar value of crude oil and crude bitumen exports fell 7.3 percent, while natural gas dropped 17.5 percent. Overall, prices for energy products declined by 4.8 percent, while volumes decreased 3.2 percent.

Fortunately, the bigger picture for the energy sector still looks bright. Despite the aforementioned performance, the value of energy product exports is still up 21 percent year over year.

And according to economists with CIBC World Markets, the pace of overall trade for the first quarter suggests that this could be the first time in a long while that export activity actually makes a positive contribution toward gross domestic product (GDP). Although this long-awaited transition is progressing slowly, it appears to finally be underway.