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Exports key to 2014 economic performance

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VANCOUVER — After a generally lacklustre 2013, what are the prospects for Canada’s economy in the coming year? As 2014 gets under way, the signs are mixed.

In the plus column are accelerating U.S. economic growth, continued low interest rates, and the positive impact of the weaker Loonie on Canada’s net trade position and competitiveness. Among the factors likely to hold our economy back in the year ahead are sluggish global commodity markets, record high Canadian household debt, government fiscal austerity at both the federal and provincial levels, and a slowdown in residential investment spending.

Overall, economic conditions should strengthen in 2014, with inflation-adjusted gross domestic product (GDP) advancing in the vicinity of 2.4 per cent, up from 2013’s estimated 1.8 per cent gain. The job market is expected to gather steam by the second half of the year, although the unemployment rate will remain above the 6.5 per cent mark throughout 2014. Inflation should edge higher from today’s rock bottom reading, but the Consumer Price Index (CPI) will continue to track below the mid-point of the Bank of Canada’s one to three per cent target range.

Consumer outlays, which account for about two-thirds of Canadian economic activity, have been more buoyant than forecasters anticipated at the beginning of 2013, particularly given a long stretch of fast-paced household credit growth over the preceding half decade. Exceptionally low inflation has helped to buoy consumers. With the all-items CPI running at around one per cent, even limited gains in disposable incomes have been sufficient to support higher consumer spending. And persistent low borrowing costs are also working to the advantage of indebted households.

Low inflation coupled with low interest rates has also proven to be a useful tonic for the Canadian housing market, which exhibited surprising resilience in 2013. Home sales and prices both moved higher, contrary to the expectations of many market analysts.

But looking ahead, Canada’s housing sector is set to lose momentum — certainly once mortgage rates climb, and possibly sooner. Virtually all leading Canadian forecasters expect housing starts to cool over the course of 2014-15. The venerable Economist magazine recently pegged Canada’s housing market as among the most "over-valued" in the world, based on what it sees as underlying economic and demographic fundamentals. With the ratios of house prices to both rents and disposable incomes sitting at or near all-time highs, the possibility of a meaningful housing market correction can’t be ruled out. But absent a sudden spike in interest rates, the most probable scenario is a period of broadly flat housing prices in most regions of the country. A few notably frothy urban markets may experience price declines.

For the past two years, forecasters and Canadian policymakers have been calling for a "rotation" of economic growth, away from a disproportionate reliance on consumer spending and housing expenditures toward stronger gains in business investment and — especially — exports. This happy picture may finally start to come into view in 2014.

Faster U.S. economic growth, combined with the end of outright recession in the Eurozone, modest growth in Japan and the U.K., and a stabilization of economic conditions in key emerging markets, should help to create a more positive backdrop for Canadian exports — the only sector of our economy that has failed to return to its pre-2008 level of economic activity.

An anticipated pick up in U.S. growth is the most important factor here. America’s real GDP increased at a solid 4.1 per cent annual rate in the third quarter of last year. U.S. housing starts are on track to exceed one million per year, up from 400-500,000 during the worst phase of the epic 2007-2011 housing market meltdown. Most forecasters now predict U.S. growth in the three per cent range in 2014, appreciably better than the two per cent average expansion of the previous three years. As the U.S. economy enters a period of hoped-for sustained growth, numerous Canadian industries stand to benefit — from lumber and other building materials to auto parts and assembly, machinery and equipment, tourism, and various segments of the advanced technology sector.

Still, any recovery in Canadian exports is apt to be fairly muted given the prevailing soft outlook for many globally-traded commodities and Canada’s loss of competitiveness vis-à-vis the United States across much of the manufacturing sector during the past decade. But even a modest jump in the value of export shipments in 2014 should be enough to underpin an improvement in Canada’s overall economic performance.

Jock Finlayson is executive vice-president of the Business Council of British Columbia.

— troymedia.com

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