Potential Nafta Collapse Poses Major Risk to Canada, Group Warns

(Bloomberg) -- Canada’s economic growth could be pared by about a quarter next year if the North American Free Trade Agreement collapses, and the drag will be extended if an automobile trade war emerges, according to a new Conference Board forecast.

Failing to renew the trade pact, currently the subject of intense negotiations between the U.S. and Canada in Washington, would cut growth by 0.5 percentage points next year before the economy recovers in 2020, the Ottawa-based research group said Thursday in its autumn economic outlook.

But if the collapse of Nafta is followed by a trade fight with both nations imposing automobile tariffs, the impact on growth will persist. A Nafta collapse coupled with a trade fight would curb growth by 0.6 percentage points next year and then another 0.7 points in 2020, the group estimates. President Donald Trump has threatened to leave Canada out of of an agreement the U.S. struck with Mexico and impose auto tariffs on his northern neighbor.

The lack of clarity on the future of the trade agreement is creating an “uncertain operating environment,” and only 34 percent of of business leaders believe now is a good time to invest, the lowest level since 2008, Matthew Stewart, the board’s national forecast director, said in the report. Carbon taxes and a concern over the country’s tax competitiveness are also weighing on business confidence, he said.

Longer Damage

The base case is for Canadian GDP growth to slow to 1.8 percent in each of 2019 and 2020, after reaching a 2 percent pace this year, principal economist Alicia Macdonald said in a phone interview. The auto trade war would trigger a bigger drop in Canada’s dollar, which would “buffer some of the other sectors” at first, while the economy suffers longer-lasting damage to business investment, she said.

The Conference Board’s forecast shows the nation’s housing market cooling through 2018, interest rates rising and employment growth moderating, all of which will “take a bite out of demand,” the board’s report said.

“With little growth in new manufacturing capacity, exports of non-energy goods will remain weak,” Stewart wrote, adding the potential for a growth pickup led by trade “seems increasingly improbable as the Nafta trade negotiations drag on.”

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