From: Catherine L. Mann
To: Concerned Canadians
Date: June 14, 2016
Re: Subdued global growth and Brexit uncertainties come lapping at Canadian shores
The OECD Economic Outlook launched last week projected global growth to languish at 3% this year (same as last year) rising to just 3.3% in 2017. OECD economies have struggled to average only 2% per year, while emerging markets have slowed, with some falling into deep recession. The prolonged period of low growth has precipitated a self-fulfilling low-growth trap. Business has little incentive to invest, given insufficient demand at home and in the global economy, continued uncertainties, and a slowed pace of structural reforms. Global trade growth at less than 3% per year on average over the projection period is well below historical rates, as value-chain intensive and commodity-based trade are being held back by factors ranging from spreading protectionism, to China rebalancing toward consumption-oriented growth. At 3% global growth, commitments to citizens, including jobs for youth and health and pensions for the old, are at risk.
Canada’s outlook is relatively brighter, with expected GDP growth of 2.2% by 2017, as the contraction of the resource-intensive sector slows. However, there are a number of external headwinds: North American economic performance, commodity prices, and Brexit. First, modest growth in the ‘’neighbourhood” undermines incentive for Canadian investment and growth. The OECD Economic Outlook marked down the projections for both the United States and Mexico. Compared to the growth of 2.4% in 2015, the United States is projected to grow by only 1.8%, a mark down of some 0.7 percentage points from our November outlook. For 2018, growth is projected for 2.2%, a mark down of 0.2 percentage points from November. For Mexico, the projection for 2016 of 2.6% represents a mark down of 0.5 percentage points, and for 2018, growth is projected at 3.0%, marked down from November by 0.3 percentage points. Second, commodity price uncertainties put Canadian investment decisions on pause—continue to bank on oil, or use this period of competitive currency environment to encourage economic diversification. A wait-and-see attitude is likely.
A third uncertainty is Brexit. The OECD research report, The Economic Consequences of Brexit: A Taxing Decision, shows the short-term cost to UK GDP could be about 1.5%, rising to a range of 3-7% of GDP in the longer-term, depending in particular on trade and foreign direct investment. But Brexit is not just an issue for the United Kingdom. The spillovers to the Euro Area could bite a bit more than 1% of GDP. Canada is not immune to the Brexit outcome and could take a hit of some 0.25% of GDP by 2018.
The OECD Economic Survey of Canada was launched in Toronto on June 13. It assesses the macroeconomic and structural policy strategies that Canada is deploying to weather the current choppy seas and prepare for a more robust future.
Catherine L. Mann is the Chief Economist and Head of the Economics Department at the OECD
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