The growth potential of the Canadian economy looks destined to be weaker for the years ahead, which will weigh on profits, and ultimately stocks, too, says Desjardins Group in a new report.
The report predicts that output growth potential “will remain rather limited” in the coming decades, primarily “due to slower growth by the working age population”. And, it says that this “will have consequences for several facets of the economy, including job creation, interest rates and the stock market.”
For 2014, Desjardins expects to see growth of just 2.2%. It notes that this has been the average annual growth rate over the past couple of years. Yet, this may look strong compared to what it is expecting in the coming 15 years or so. It suggests that the combination of very soft growth in total hours worked and annual labour productivity growth “implies that Canada’s potential for economic growth will remain between 1.5% and 2.0% from now until 2030.”
In the next couple of years, it expects real GDP growth will be just above the 2% mark. “This projection is above potential because Canada’s economy has not yet recovered from the harmful effects of the great recession. There is also still excess production [capacity],” the report says.
It expects that the Canadian economy will return to full production capacity in late 2015 or early 2016. And, that real GDP growth should slow, starting in 2017, returning to a pace closer to its long-term potential. “On average, annual real GDP growth should rise to 2.0% between 2014 and 2020. For the 2021–2030 decade, annual real GDP growth should stand at an average 1.7%,” it says.
After 2030, growth in hours worked is expected to accelerate somewhat, it says, which will “open the door to slightly higher growth potential for real GDP.”
In the meantime, however, this weaker potential means interest rate equilibrium levels will be lower than in the past, Desjardins says. And, it suggests there will be softer growth in business profits, “which could result in lower stock market gains.”