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Trade uncertainty slows global economy

Jul 16, 2019

The Bank of Canada (BoC) released their quarterly economic outlook last week and maintained their policy interest rate at 1.75%.

Economic conditions in Canada are positive

There’s a lot to like about current economic indicators in Canada: business sentiment is rising, mortgage growth is accelerating, unemployment is low, and wages are growing faster. Monetary policy is however forward looking. The BoC considers balancing both upside and downside risks to the Canadian economy. On this front, there are a few variables to monitor.

Ongoing trade tensions are having a substantially larger impact on the global and Canadian economies than previously estimated.  Growth in global trade and manufacturing has weakened significantly over the past year.  As a result, the BoC has revised growth forecasts downward.  Canadian GDP growth is expected to increase 1.3% in 2019 and 1.9% in 2020. The 2020 projection is lower than three months ago when it was estimated at 2.1% in 2020 while growth in 2019 is up slightly from 1.2%.

Ongoing trade tensions weigh on the global economy

Projections are for China’s economy to grow at a slower pace, mostly because trade tensions have led to reduced private sector investments in manufacturing and lower commodity prices for oil and base metals.  The BoC projects growth of the Chinese economy to be 6.1% in 2019 and 5.9% in 2020.  The BoC estimates that restrictions on Canadian canola and meat exports to China will reduce overall Canadian exports by 0.2%. Not a large number for the overall economy, but definitely significant for the agriculture industry.

Total Canadian exports to all countries are projected to improve but the BoC indicated exports are the wildcard in an uncertain trade environment.

The U.S. economy is robust, adding 224,000 jobs in June. The BoC projects the U.S. economy to grow at 2.5% in 2019 but will slow to 1.7% in 2020. The U.S. Federal Reserve is expected to cut its key policy rate at the end of July.

Interest rates pushed lower

The expectations of a global economic slowdown due to trade conflicts are leading to falling bond yields and an inversion of the yield curve in the U.S. and Canada. Historically, inverted bond yields have pointed to a possible future recession. However, the BoC has indicated the recent yield curve inversions are less powerful signals of a recession than they have historically. But they are a concern about future growth.

What does this mean for Canadian agriculture?

Recent central bank discussions and actions are likely to keep the loonie above US$0.75 in the foreseeable future.

Lower bond yields imply an opportunity for businesses to consider fixing interest rates for the long-term. It will be imperative to keep an eye on the health of the global economy as Canadian agriculture is heavily dependent on trade. Slower global growth could lead to a softer demand for ag and food products.

Leigh Anderson

Senior Economist

Leigh Anderson is a Senior Economist at FCC with experience in agricultural markets and risk. He specializes in monitoring and analyzing FCC’s portfolio, industry health and providing industry risk analysis. In addition to his speaking engagements on agriculture and economics, Leigh is a regular contributor to the FCC Economics blog.

Leigh came to FCC in 2015, joining the Economics team. Prior to FCC, he worked in the policy branch of the Saskatchewan Ministry of Agriculture. He holds a master’s degree in agricultural economics from the University of Saskatchewan.