Auto and Oil Woes Cast Pall Over Canada’s Economic Expansion

(Bloomberg) -- Turmoil in Canada’s two largest export sectors threatens to undermine the country’s so-far-so-good economic expansion.

General Motors Co.’s announcement Monday that it plans to pull production from its plant in Oshawa, east of Toronto, raises concern about the auto industry’s viability in Canada. It came on the heels of an emerging crisis in the oil sector, which is struggling with plunging prices and transportation bottlenecks.

Combined, the energy and automotive industries generate almost one quarter of Canadian export receipts. So their troubles are a reminder there are no guarantees the economy will be able to pull off a smooth transition to a business-led expansion as consumers begin to tap out. Third-quarter gross domestic product data is due out Friday.

“The news that we’ve been seeing both in terms of the energy and the auto sectors gives a little bit more caution to the degree of that pickup in exports and investment on a go-forward basis,” Craig Wright, chief economist at Royal Bank of Canada, said in an interview.

Auto and Oil Woes Cast Pall Over Canada’s Economic Expansion

Until now, things have been going well for Canada’s economy. It grew by a Group-of-Seven-best 3.1 percent in 2017, and is continuing to expand at a healthy clip of 2 percent this year even in the face of higher interest rates. A recent recovery in business investment, an improving trade picture and still growing consumer spending are helping to fuel the growth.

Statistics Canada’s latest GDP estimates are expected to show the economy grew by about 2 percent in the third quarter, in line with the 2.2 percent pace posted in the first half of 2018.

But to keep growth at or near these levels going forward will require businesses to continue stepping up in terms of investment and exports. Most economists believe Canada’s highly-indebted households are about to slip into a long-term slump as borrowing costs rise, with consumer spending projected to slow down to some of the weakest levels on record outside of recession.

Yet the recent developments in the auto and oil sectors raise the prospect that transition may need to take place without two critical industries -- a major handicap.

While the shutdown of GM’s Oshawa plant will only affect about 3,000 hourly and salaried workers -- economists at Bank of Montreal estimate GDP could be hit by as much as 0.2 percent over a full year -- the concern is it could snowball to other companies and spill over into the auto parts sector.

‘More to Come’

“If there is a ‘canary’ out there it has been slowly dying for quite some time,” Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc., said by email. “I am not saying that Canada will become Australia and eventually lose all its vehicle assembly operations, but there is more to come.”

The oil industry’s problems could be even more significant. Economists at Toronto-Dominion Bank estimate a hit of 0.5 percentage points to growth if the current pricing environment persists, though they do expect a rebound.

Gluskin Sheff’s chief economist and strategist David Rosenberg estimates a larger-than-consensus growth hit of 0.4 percent from the General Motors shutdown, with a similar 0.5 percent hit from oil. That would take Canadian growth down closer to 1 percent, far from the current pace, he said in a Nov. 27 research note that included ten reasons “to hate” the Canadian dollar.

“As for Canada, the tale of woes continues,” he said.

©2018 Bloomberg L.P.