Three economic predictions for 2018

January 2, 2018
Jock Finlayson

The coming year is sure to bring its share of surprises for both economic prognosticators and business decision-makers. After all, 12 months ago almost no one foresaw the Canadian dollar rallying by 7% against the US currency over the course of 2017. Nor was there much confidence among business commentators that the Trump administration would succeed in pushing through a major package of tax reforms and rate reductions. And while Donald Trump had been harshly critical of NAFTA before becoming US President, most Canadian analysts expected his administration to seek modest changes to the agreement – not the root-and-branch overhaul that threatens its continued existence.

So, what does 2018 have in store on the economic front? Here are three predictions:

The Americans wave good-bye to NAFTA

At this point, the odds of renegotiating NAFTA on terms acceptable to the three signatories are no better than 25/75. Goldman Sachs recently concluded that a US withdrawal announcement in the first quarter of 2018 “looks more likely than not….” Whether this would set the stage for a subsequent set of talks to save the agreement or instead usher in NAFTA’s formal demise is unclear. Also unclear is whether the 1987 Canada-US free trade pact would spring back to life to govern bilateral commerce if NAFTA disappears. In any case, the unravelling of NAFTA, assuming it happens, would create short-term pain for Canada and undoubtedly lead to a period of slower economic growth. But the more significant negative impact will be felt over time, as more companies producing for the North American market choose to invest and expand in the United States to ensure barrier-free access to the world’s largest economy and avoid the added costs, risks and uncertainties associated with a thickening Canada-US border. The far-reaching tax policy changes adopted by the US Congress and signed by the President in December only compound the competitiveness challenges facing Canada as NAFTA’s fate hangs in the balance.

Alberta leads the country in economic growth…but BC puts in a respectable showing

Alberta topped the provincial growth charts last year, as its economy rebounded following the recession of 2015-16 that was triggered by slumping oil prices. Leading Canadian forecasters expect a repeat performance in 2018.[1] BC is also poised for another year of solid growth, on the heels of last year’s impressive 3.3% increase in real GDP. We project that BC will post the second fastest GDP growth rate among the provinces this year, the same as in 2017, fueled by consumer spending and continued strength in the tourism, construction and high-tech sectors.

At least one major BC-based corporation announces the relocation of its head office

Perched at the far western edge of continental North America, BC has long struggled to attract, retain and grow the corporate head offices of large and medium-sized businesses. In the past 25 years, dozens of significant BC companies have disappeared due to industry consolidation and mergers/acquisitions, while others have re-located to out-of-province jurisdictions. At the same time, we have seen the emergence of more locally-based companies in industries like advanced technology, real estate, mineral exploration, construction, and scientific and technical services. However, maintaining a vibrant corporate sector in BC is about to get harder. For one thing, the US is now cutting business and individual taxes, while most governments across Canada are busy raising taxes and imposing all manner of extra costs on business and industry – a trend that’s likely to draw capital and talent away from BC and other provinces in the years ahead.

More importantly, the high cost of housing in the lower mainland is making it increasingly difficult to recruit top talent to the region and encouraging some well-educated people in their 30s to consider relocating to more affordable communities. Being burdened with some of the world’s most expensive housing relative to incomes is a competitive handicap for the Greater Vancouver region. The striking misalignment between housing costs and incomes – even for the most affluent 10% of the working population – could contribute to a slow asphyxiation of the corporate sector, as more companies conclude that building global-scale businesses in Metro Vancouver is simply not feasible in the face of astronomical land and housing costs.

[1] For example, see TD Economics, “Provincial Economist Forecast,” December 14, 2017.

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