Economists at Bank of Nova Scotia have lowered their forecast for Canadian gross domestic product (GDP) growth this year to 1.0%, and trimmed their 2016 forecast to 1.7%, reflecting “a sharper pullback in resource activity.”
Although the consumer and housing markets in Canada “remain reasonably buoyant, persistently weak commodity prices are weighing on industrial output and business investment,” according to the bank’s latest Global Forecast Update published on Tuesday.
Non-resource exports have been slow to ramp up, the report says, although these components should eventually benefit from “improving U.S. demand and a more competitive currency.”
Against this background, the federal government will have a hard time achieving a balanced budget over the next couple of years, the report notes. “The dampening impact of weaker commodity prices and lower nominal GDP through calendar 2016 suggests that balanced books in fiscal 2015-16 and 2016-17 will require difficult decisions,” the report says.
The uncertain climate has also prompted Scotia to trim its global growth forecast for this year to 3.0%, and it has revised its forecasts downward for most countries, apart from the U.S. and the U.K.
Scotia is lowering its growth forecast for Europe to 1.3% in 2015 and 1.6% in 2016. “Incoming economic indicators suggest that the euro zone recovery remains on track; however, the growth outlook has been tempered by months of political uncertainty in Greece and recent turmoil in China,” the report says.
Scotia has also revised its Chinese real GDP growth forecast downwards “on the back of ongoing evidence of a slowdown portrayed by subdued high frequency indicators in industrial production, retail sales and exports.” As a result, Scotia now expects output to grow by 6.8% this year and 6.4% in 2016.
One of the lone bright spots in the update is the U.S., where Scotia has raised its forecast for GDP growth this year from 2.3% to 2.5%. However, Scotia has also trimmed its 2016 forecast for U.S. GDP growth from 2.8% to 2.6%, citing the volatile and uncertain global outlook.
“The challenging conditions around the world do pose some risk to the U.S. outlook,” the report says. “The softer global environment coupled with persistent U.S. dollar strength has the potential to weigh on U.S. growth. Weaker exports and stronger imports are already resulting in a reduction in net trade, while profits from foreign earnings will be increasingly pressured. Business investment outside of the tech sector will also be constrained, primarily by the softness in energy-related expenditures, but also in agriculture and other sectors affected by the decline in commodity prices.”
Oil prices are also expected to remain low for longer, the report says. “The global market remains significantly oversupplied, but other factors are also at play, including the strong U.S. dollar and questions over prospective demand in a slower-growth environment,” it says. “Although this situation is not sustainable over the longer term given the generally higher production costs in most producing regions outside of the Middle East, the needed adjustments to restore market balance will take longer to materialize since OPEC nations are continuing to boost oil output, while U.S. shale production remains quite resilient and worldwide inventories are very large.”
This weakness in oil prices, and commodities generally, also signals a “prolonged period of very low overall inflation”, the report says. Although the report still expects the Bank of Canada will remain on hold through 2016, it allows that “there is an increasing risk of an even more accommodative policy if the country’s economic underperformance persists.”