Forecast 2019: Floating on Air, and Deficit Spending

In the face of falling oil prices and rising interest rates, Canada’s economy remains buoyant. But the growth cycle is nearing an end
oil sands

The essentials

Economic forecast for 2019:

  • Real GDP growth rate of 2%
  • Inflation rate slowing to 2%
  • Unemployment rate falling to 5.75%
  • Interest rate (prime) of 4.45%

The Canadian economy will remain upbeat in 2019, despite falling oil prices and rising interest rates.

That’s the prediction Evan Dudley, associate professor of finance at Smith School of Business, Queen’s University, made recently at the school’s annual Business Forecast Luncheon.

“The economy is pretty much at full capacity right now,” he said, “but it’s still going to grow.”

Real gross domestic product will rise two percent nationwide in 2019 — the same as this year.

Record low unemployment of 5.8 percent in October will fall to 5.75 percent by October next year.

Deficit spending remains an important economic stimulator. “Neither Canada nor the U.S. seem interested in lowering their deficits,” Dudley said. “That’s why I still see room to grow, even though the economy is already doing really well.”

Ongoing worldwide demand for Canadian fuel, minerals, and other resources will also contribute to growth.

After raising interest rates three times in the last year, the Bank of Canada will hike rates just twice next year (by 25 basis points each time). “It’s going to err on the side of caution as long as oil prices remain low,” Dudley said.

The Canadian economy has diversified away from the oil sands

The central bank will not be as aggressive on rates as the U.S. Federal Reserve. As a result, the Canadian dollar will slide to 70 cents against its American counterpart by next December (it is 75 cents now.)

Inflation, which stood at 2.4 percent in October, will slow to two percent next year. The prime interest rate will reach 4.45 percent by next December, up from 3.95 percent now.

Rising wages, falling home prices, and Canadians’ recent tendency to spend with debt signal an end to the current growth cycle. But Dudley anticipates a gradual slowdown rather than a sharp fall into recession.

He also does not believe the recent fall in oil prices will trigger a nationwide downturn. When oil prices fell in the past, so did the Canadian dollar — not surprising considering that revenues from oil sands makes up almost two percent of Canada’s GDP. But that is not happening now, Dudley said. “It tells me the Canadian economy has diversified away from the oil sands.”

Robert Gerlsbeck

Smith School of Business

Goodes Hall, Queen's University
Kingston, Ontario
Canada K7L 3N6

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