The economy of Canada: between a rock and a hard place

The economy of Canada: between a rock and a hard place

Today, Canada is considered to be one of the soundest countries in the world, including its robust monetary policy, low budget deficit and strong natural resource base.

The Canadian economy is usually characterised as a highly developed mixed economy. According to the 2019 Index of Economic Freedom, Canada’s score is 77.7, ranking its economy the 8th freest in the world. In 2018, the country had the world’s 10th largest nominal GDP and the 17th largest GDP by purchasing power parity.

Employing about three-quarters of the citizens, the service industry dominates the economy. However, the country's vast natural resources drive its exports. Canada is a world’s leader in the production of many commodities, including potash, coal, copper, nickel, zinc, as well as platinum, gold and silver. 
Moreover, the country is the world’s fourth-largest exporter of natural gas and petroleum. A number of Canada’s major companies are operating in natural resource industries. These are Barrick Gold, Encana, Cameco and Goldcorp.

The total estimated value of Canada’s natural resources is around US$33.2 trillion.

All of these factors have helped Canada become one of the principal global investment destinations, especially for U.S. investors. In 2018, Canada exported US$450.7 billion in goods. About three-quarters of these exports (76.4%) were delivered to its North American trade partners, the U.S. and Mexico. In fact, trade with these countries has tripled since 1994 when the NAFTA agreement was signed.

However, strong trade bonds with the U.S. can also be viewed as one of the weak points of the country’s economy. Canada struggles to overcome a geographic handicap as it does not border any countries other than the US.

This makes the shipment of goods to other markets more expensive and makes Canada more dependent on its neighbour. This dependency is even sharper when viewed in terms of the country’s most profitable export: petroleum. And the U.S. is practically Canada’s only customer in this regard.

The oil market is oversupplied now, experiencing continuous price fluctuations. Canada has lost a significant market share in its most important trading relationship with the U.S. as other countries can offer similar goods at lower prices.

Recent trade conflicts with the U.S., including tariffs on agricultural and dairy products, only added fuel to the fire. However, it is expected that the replacement of the NAFTA agreement with the revised USMCA agreement will solve the majority of issues.

Presently, the Canadian government is focusing its attention on trade diversification, export promotion and support for domestic industries and small businesses. The transparent regulatory framework provides a strong basis for commercial activity, enabling businesses to operate more efficiently and vigorously.

Presently, the country is a member of the Asia-Pacific Economic Cooperation, G7, G20, the Organisation for Economic Co-operation and Development and the World Trade Organisation.

Speaking about the economic outlook, Canada is currently facing some issues with labour shortages, technological changes, volatile commodity prices, rising interest rates and the aftermath of trade tensions between the U.S. and China. However, it is expected that global economic growth, as well as increasing employment, exports and investments will provide the basis for the Canadian economic expansion to remain solid through the second half of 2019.

The economy of Canada has operated below full capacity over the last several years, while economic growth slowed from 3.0% in 2017 to only 1.8% in 2018. However, it is projected to reach its full capacity in 2020.

Bringing it all together, real GDP growth is expected to settle at around 1.3%-1.4% in 2019, before strengthening to 1.7% in 2020.

The current economic forecast may look quite challenging, with business stagnation risks in place. However, it is important not to develop a recession mindset and use economic challenges as a good motivator for innovation and change.

As of August 2019, Canada has 51 companies on the Forbes Global 2000 list, ranking ninth ahead of Switzerland and behind Germany.