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With U.S. recovering, expect Canadian economy to be taken along on ride: report

OTTAWA - Confidence is growing that the Canadian economy is rebounding from a weather-related winter hiccup and is poised to take advantage of stronger U.S. demand.

International forecasting house IHS Economics — formerly known as IHS Global Insight — became the latest to offer a relatively positive spin on Canadian prospects as it predicted growth picking up for the next three years.

The firm says growth will average 2.3 per cent this year, 2.5 per cent next year and 2.7 per cent in 2016, with unemployment rates dropping to 6.5 per cent by the third year. The 2016 projection is half-a-point stronger than the Bank of Canada's more modest call.

But IHS chief economist Arlene Kish is confident the U.S. economy is ready for a major rebound from the first quarter's weather-induced mini-slump and that will translate into stronger activity in Canada.

The U.S. accounts for more than 70 per cent of Canadian exports.

"We did differ (from the central bank) in terms of 2016 economic growth," she says in the paper. "Part of this may be explained by the fact that IHS is more bullish on U.S. economic growth for 2016 and the impact it would have on the Canadian economy."

Kish said while Alberta will continue to be the major driver of Canadian growth, she also has Ontario — the country's manufacturing heartland — staging a comeback from two sub-par years.

Canada's most populous province is projected to grow by 2.4 per cent this year rising to 2.7 per cent in 2016, essentially matching the national average.

Ontario's goods-production sector, including manufacturing, should benefit from the increased U.S. demand, adding that the province's underperforming jobs market will likely catch up to the national average of one per cent growth in 2014.

The IHS view dovetails with other voices that seem be becoming increasingly convinced the headwinds of the past couple of years, when growth rates averaged below two per cent, may be dissipating.

Risks remain, as the Bank of Canada has observed.

China's run-away growth has slowed, and while Europe is out of recession, it is still barely limping forward. But Canada's fortunes are most closely tied to the U.S. and that economy is, with a few exceptions, starting to show signs of normalizing.

The New York Times noted this week that U.S. Federal Reserve chairwoman Janet Yellen is finally getting the recovery she has been asking for, particularly in terms of job creation and firmer inflation, which is an indication producers can demand and get higher prices for their goods.

After being cited as a major concern in Canada, inflation is also lifting. Scotiabank said Friday it expect next week's reading on headline inflation for April will rise to two per cent, exactly where the Bank of Canada wants it, even though underlying inflation till lags the target.

"This article has argued that rising inflation would increase the pressure on the BoC to drop ongoing emphasis upon downside risks to inflation and drop its ambivalence over the direction of future rate changes," wrote Scotiabank economist Derek Holt in a note to clients.

"Into the second half of this year, it is going to be less credible to continue to flag ongoing worries."

Any thoughts of rate cuts in the future have now become "passe," he added.

The major concern with the Canadian economy going forward is now increasingly turning toward the housing market, which against all odds continues to show remarkable strength, even if it is concentrated in the major markets.

Capital Economics analyst David Madani said Friday he still expects there will be a "severe correction" in the housing market, with prices falling as much as 25 per cent. That would not be a crash, he says, as it would bring prices back in line with income growth, or back to fundamental values.

But it would take cut into growth rates as housing impacts construction, appliance and furniture makers, retailers and is closely tied to consumer confidence.

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