Economic Outlook
Great Lakes-St. Lawrence Region:
SLOWDOWN TO STABILIZE BMO Capital Markets Senior Economist Robert Kavcic gives his forecast for the region’s economy and the major sectors supported by marine shipping THE REGION’S ECONOMY CONTINUES TO SLOW DOWN ALONGSIDE BROADER TRENDS IN CANADA AND THE UNITED STATES, AND 2020 WILL BE CHALLENGED BY THE COVID-19 OUTBREAK.
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he Great Lakes-St. Lawrence region remains a vital driver of North American economic output, employment and trade, accounting for roughly a third of combined Canadian and U.S. output, jobs and exports. The region’s economy continues to slow down alongside broader trends in Canada and the United States, and 2020 will be challenged by the COVID-19 outbreak.
Consumer spending moderating Overall, consumer spending has moderated, but housing activity has firmed on both sides of the border, counter to typical late-cycle trends. One major reason is that a plunge in long-term interest rates and three Federal Reserve interest rate cuts in 2019 have supported activity. On the flip side, business investment continues to lag, while the virus outbreak is shutting in travel and disrupting supply chains. This is especially important in manufacturing-heavy regions such as the Midwest United States and Central Canada.
Against that backdrop, U.S. economic growth is forecast to decelerate to 1.5 per cent this calendar year, down from a 2.3 per cent pace in 2019. Growth in the second half of the year should be running stronger as activity presumably returns to normal. Canada is expected to grow 1.2 per cent this year, with Ontario and Quebec remaining strong spots. Most U.S. states in the Great Lakes-St. Lawrence Region are also expected to moderate—growth for most peaked in 2018. For the region overall, we expect 1.3 per cent real GDP growth in 2020, versus 1.7 per cent last year and 2.0 per cent in 2018.
USMCA ratified, China still uncertain Trade policy is an important factor in 2020, given that the Great Lakes-St. Lawrence region accounts for more than half of all Canada-U.S. crossborder trade. That said, President Trump’s signing of the USMCA deal, and an expected quick ratification in Canada, removes a major cloud of uncertainty from the business sector. Ontario business confidence could benefit the most, with nearly 83 per cent of shipments from the province flowing south of the border. The trade dispute with China is the bigger issue for the region, especially on the U.S. side. But, similarly, the Phase One trade deal signed late last year has finally steered talks on a more positive course. If this continues ahead of the 2020 U.S. election, it would be good news for the business sector.
Manufacturing ebbing The auto sector has softened, with U.S. sales levelling off around the 17 mln annualized level. While this is a still-solid level, consumer demand has clearly run into some late-cycle constraints. Meantime, Canadian sales have retreated from record highs, posting a second consecutive annual decline in 2019. As a result, overall North American production fell for a third consecutive year in 2019, and we expect continued softness this year. Part of this reflects late-cycle dynamics, while part reflects an ongoing structural shift in production away from Ontario and the Midwest, toward the Southern U.S. states and Mexico—GM’s Oshawa closure is a prime example. Broader factory activity has ebbed as well, consistent with much of the sector cooling after a strong run through 2017 and 2018. Indeed, regional manufacturing surveys in Chicago and Milwaukee have shifted down from cycle-high readings for new orders and employment, suggesting more moderate growth this year.
U.S. homebuilder confidence at new highs The housing market is firming on both sides of the border, largely driven by last year’s plunge in long-term interest rates. U.S. mortgage rates have fallen by 100 bps over the past year, while five-year fixed rates in Canada are near cycle lows. U.S. homebuilder confidence has rebounded to new highs, outpacing even levels seen at the height of the boom in 2007. Various policy measures 31
