How Canadian economy will be shaped by 'triple C' threat

The Canadian economy will be shaped by the threat of the “triple C” in 2019 and for years after, according to Russell Investments.

Shay Kshatriya, director for investment strategies in Canada, believes consumption, crude oil and competitiveness are the key themes investors should be tracking.

He explained that nearly 60% of Canadian economic output is attributed to personal consumption, which is highly correlated to slowing housing trends. Crude oil is also critical, he said, because of the volatility linked to domestic pipeline constraints.

“A healthy energy sector is not only critical for business investment, but also exports, as energy products account for nearly 20% of total Canadian exports,” Kshatriya said.

The final “C” is competitiveness, with Kshatriya admitting it’s no secret Canada is struggling in this area compared to its American and Mexican counterparts because of the strength of the Canadian dollar during the commodities boom in the 2000s and subsequent rising labour costs relative to US and Mexico, and the lack of investment in general.

He said: “The recently announced Fall fiscal update from the Federal government specifically aimed to address this through tax breaks for businesses and other measures, but is merely a start. In any case, 2019 appears to be a pivotal year.

“While growth is expected to be respectable, we believe a potential recession in 2020 will make 2019 a wildcard for financial markets. As well, let’s not forget it is a Federal election year, which brings its own nuances.”

In its forecast for 2019, Russell Investments believes GDP Growth will be between 1.7% to 2.1% with a warning about the risks of excessive household indebtedness that are becoming more impactful as rising rates bite.

In terms of the rates, Bank of Canada has already signaled its intention to reach a neutral stance, which it defines as between 2.5% to 3.5%, to achieve its inflation target.

However, Russell Investments doubts this policy will reach the mid-3% range as consumers begin to feel the pinch, predicting two hikes in 2019 to bring the target rate up to 2.25%.

And finally, it believes “fair value” for the Canadian 10-year bond yield is to be centered around 2.6%, with the end-of-year range between 2.4% and 2.8% as the yield is pulled up by rate hikes in Canada and potentially three or four from the Federal Reserve.

Kshatriya said: “The upside risk to yields comes from a more hawkish BoC (and Fed) versus our baseline, in part due to stronger global growth; downside risks would reflect weakening global growth and a depressed commodities outlook.”