5 minute read
ECONOMIC OUTLOOK
BMO Capital Markets Senior Economist Robert Kavcic gives his forecast for the region’s economy and the major sectors supported by marine shipping
The 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
to cool markets in Southern Ontario have faded, while demographic and job-market fundamentals across Southern Ontario remain strong and price growth has accelerated. Meantime, Montreal arguably now boasts the strongest market in the region (London and Windsor are making a bid too), with a strong job market and increased nonresident interest driving 7 per cent price growth. All told, the longevity of the housing cycle has been extended by recent central bank rate cuts. After the Federal Reserve and Bank of Canada each cut rates by 50 bps in early March, we expect an additional 50 bps of easing by both central banks through the middle of 2020. This is largely in response to the COVID-19 impact. Population flows mark one stark difference between the Canadian and U.S. sides of the region. In Ontario, for example, the population grew 1.7 per cent in 2019, matching the fastest pace in almost 30 years, driven by international and interprovincial inflows. At the other extreme, Illinois’ population is in outright decline, with the 0.4 per cent drop the weakest of the post-war era. As such, we continue to see firmer underlying potential growth on the Canadian side of the Great Lakes-St. Lawrence border, assuming productivity growth remains relatively stable. The Bottom Line: The Great Lakes-St. Lawrence region’s economy has moderated along with most of North America, and the COVID-19 impact will weigh heavily on growth through the first half of the year. But, with trade
Ontario, Canada
uncertainty ebbing, interest rates down, the expansion will likely continue, and we should see growth firm again through the latter stages of the year.
Real GDP (% change) 2018 2019e 2020f
United States 2.9 2.3 1.5 Canada 2.0 1.6 1.2 Great Lakes-St. Lawrence 2.0 1.7 1.3
Great Lakes-St. Lawrence Region Detail Ontario 2.2 1.7 1.3 Quebec 2.5 2.8 1.4 Illinois 2.1 1.6 1.0 Indiana 2.0 0.8 1.8 Michigan 2.5 2.0 1.3 Minnesota 2.6 1.5 1.5 New York 2.0 1.6 0.9 Ohio 1.9 1.7 1.4 Pennsylvania 2.0 1.5 1.2 Wisconsin 2.4 1.3 1.1
Source: BMO Capital Markets Economics
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