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Canadian Forecast 2015

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Strong U.S. Outlook a Breath of Fresh Air for Canadian Market Canada is counting on its currency advantage and greater exports to its primary trading partner, the United States, to give it a boost in 2015. By Tim Triplett, Editor-in-Chief Economists are fond of saying that when the United States sneezes, Canada gets a cold, so symbiotic are the two economies. Today, with most economic indicators pointing up, the U.S. is breathing a sigh of relief and Canada is enjoying the fresh trade winds. There are key differences between Canada’s outlook for 2015 and the forecast for the United States, however. Canada and the U.S. enjoy the largest trading partnership of any two countries with some $634 billion in reciprocal commerce each year. While most other countries struggle with various economic woes, the U.S. boasts the strongest economy in the world, with GDP growth of around 3 percent predicted by most experts next year, barring another disastrous winter. Canada’s GDP is forecast at about 2.7 percent. Both would be modest but welcomed improvements over 2014. “We’re seeing all these slowdowns in the rest of the world, which begs the question: Can the U.S. go it alone? We think that it can. The U.S. is a very domestic, consumer-oriented economy and not as dependent on exports as most others, including Canada,” says Dina Ignjatovic, economist with TD Bank of Toronto. Because of the U.S. economy’s relatively good health, the value of the dollar is surging and should remain strong at least through the first half of next year, Ignjatovic says. That’s good news for the more export-dependent Canadian economy. “Looking at Canada now, the weaker currency will definitely help on the export side. Canada is a very export-oriented economy and, despite recent trade agreements, the U.S. will remain its most important trading partner, given its size and proximity,” she says. Canada’s comparatively weak currency gives it roughly a 10 percent cost advantage. “The Canadian dollar, now at about 88 cents, will remain in the 85-90 cent range versus the U.S. over the next two years. We don’t see it getting back to parity anytime soon,” she adds. The labor market remains the biggest drag on the U.S. economy, Ignjatovic says, despite adding an average of 227,000 new jobs each month through September this year. Persistent underemployment—including the unemployed as well as workers forced to settle for part-time jobs or positions for which they are overqualified—continues to weigh on consumer spending. “As the economy gains strength and employers gain confidence in the recovery, you will see that slack dissipate. We expect it, slowly but surely.” Because Canada was so quick to recover from the recession, which was much milder north of the border, its labor market is healthier today. “The unemployment rate is the best it has been since the recession, with just a little slack. So that is a good sign, and we expect full-time employment to pick up,” Ignjatovic says. Many of the new jobs in Canada are energy related, driven by exploration of the shale plays to the west. “If you look across Canada, it has been Alberta that has driven the overall growth. Saskatchewan has performed well, too,” she says. The booming energy industry also has been a job creator in the United States. The housing markets are very different in the two countries. Canada did not suffer from the same burst housing bubble that devastated the market in the U.S. Different banking regulations kept lenders from issuing such questionable subprime loans. While the U.S. was digging out from under thousands of loan defaults, the Canadian construction industry kept building. “It was surprising how fast sales and prices were right back up to where they were prior to the recession. The housing market has been going strong for the last two years in Canada,” Ignjatovic says. It has done so well, in fact, that housing in Canada is expected to cool next year, while residential construction heats up in the United States. Prior to the bubble, there was a lot of overbuilding in the U.S., at over 2 million housing units per year. Since then, the market has suffered from under building. Demographically, the U.S. needs around 1.5 million new homes annually. The construction industry is just nearing the 1 million unit mark again. “Going forward, we should see a lot of growth in the construction sector in the U.S. Prices, interest rates and affordability are still good in both countries,” Ignjatovic says. Nonresidential construction is forecast to grow around 5 percent in the U.S. next year, a slight deceleration from this year. In Canada, commercial and industrial construction will grow around 3 percent, even as residential building declines. “In the construction market in Canada, residential is definitely weighing it down while non-res is pushing it up,” Ignjatovic says. North American auto production is forecast to increase next year, but not in Canada. Chrysler has announced plans to shut down its Windsor plant for three months for retooling, which will take a big chunk out of its first-quarter production. It is phasing out assembly of its Dodge Grand Caravan at the plant, with no word on what platform might replace it. GM is planning to close at least one of the lines at its Oshawa, Ontario, plant and will move production of the Chevrolet Camaro to Lansing, Mich., in 2016. “Mexico and the southern U.S. are doing very well, but the outlook for Canada for auto assembly production is not very bright,” Ignjatovic says. Canadians are hopeful the stalled Keystone XL pipeline may finally get the go-ahead now that Republicans have control of both the House and Senate in the U.S. That remains a question, however. Last month, for the ninth time, the House passed a measure authorizing construction of the controversial pipeline. But the Senate blocked a similar measure by a single vote as Democrats chose to support their pro-environment base. Republicans will undoubtedly try again once they take over the Senate in January. Even if passed by both houses, President Obama may stand firm on his environmental objections and veto the legislation. Some analysts contend that six years after the project was announced, conditions have changed to the point the pipeline is no longer needed. When TransCanada first proposed Keystone XL, oil was selling for more than $100 a barrel. Today the price is around $77. If it goes much lower, drilling in the shale plays may slow from a lack of profitability. Meanwhile, fracking in the U.S. has taken off, and Canadian crude has found other ways to market via other pipelines, rail and truck. Keystone was expected to transport 830,000 barrels a day. By next year Alberta will have rail capacity to handle about 700,000 barrels a day. Overall, the outlook for both countries in 2015 is very positive, says Ignjatovic, the Toronto-based economist. “What happens in the U.S. ultimately affects what happens here. And the fact that we see continued strength in the U.S. economy is definitely good news for Canada.” View from the steel sector In the absence of the Keystone pipeline, the steel industry has benefited from greater demand for rail cars and tanker trucks, notes John MacDonald, president and CEO of Taylor Steel, Inc., in Stoney Creek, Ontario. He believes Keystone XL would still be good for the economies on both sides of the border. “There is a lot of building associated with oil drilling,” he says, such as pumping stations and storage facilities. Carl Parker, chief procurement officer for Samuel, Son & Co., Limited, Mississauga, Ontario, also sees future opportunity if Keystone is approved. While much of the large-diameter pipe for the Keystone project has already been purchased and produced, it would require a lot of smaller-diameter feeder lines that could still give a boost to the market for flat-rolled steel. In addition, some of the large pipe that has been sitting in storage may need to be refurbished or replaced, he says. Both MacDonald and Parker have questions about the steel supply in Canada. “The current steel market in Canada is stable, but the outlook is uncertain. The U.S. Steel Canada situation is an unknown right now,” says MacDonald. U.S. Steel reportedly is considering the sale of its unprofitable Hamilton and Lake Erie Works facilities. The company did not respond to Metal Center News’ request for comment. The Lake Erie facility is a modern producer of 2.5 million tons of hot-roll per year. The Hamilton mill houses an up-to-date cold mill and automotive galvanizing line. “In terms of the other assets, beauty will be in the eyes of the beholder. It depends on who buys it and what they do with it,” MacDonald says. Like MacDonald, Parker has no direct knowledge of U.S. Steel’s rumored plans to sell its Canadian mills, but such an event could have a significant affect on a distributor like Samuel, he says. “It would definitely have an impact. It depends on how the new owners would want to operate it in the longer term.” Lake Erie Works is primarily a hot-roll supplier. Hamilton Works mainly supplies coated steel. “Taking coating lines out of the market would be contrarian when automotive and construction demand are improving,” he says, noting that ArcelorMittal Dofasco is in the process of starting up a new hot-dip galvanizing line targeted at the automotive market. ArcelorMittal executives also declined requests for comment. More than half of Taylor Steel’s business is automotive-related, on both sides of the border. Automotive OEMs have invested heavily in plants and equipment in the U.S. and Mexico, but very little in Canada. MacDonald anticipates about a 4 percent decline in Canadian auto production next year. Commenting on GM’s plans to move car lines to other plants in the U.S., he adds: “There is no new platform at Oshawa beyond 2016, so it is a concern to the whole automotive supply community.” Steel pricing is very much up in the air for 2015 in both Canada and the United States, MacDonald says. “So much depends on mill utilization. I think with the American economy getting stronger and the mills utilizing more capacity, along with further consolidation of the steel business, there will be an opportunity for higher prices. The healthy U.S. economy will be a target for imports, though, and that will have a moderating impact on steel pricing.” Samuel is forecasting a more stable flat-rolled pricing environment going into next year. Major mills announced a $20 per ton increase this fall, which has eased some of the downward pressure. But iron ore and scrap prices are declining, which makes further hikes in the steel price difficult, he says. “I think there could be some downward pressure as we balance out through the fourth quarter, but hopefully things will improve as we head into a stronger first quarter,” Parker says. Samuel forecasts about 4 percent growth in its sales for 2015. Most parts of the global economy are experiencing weakness to one degree or another, but the U.S. and Canada are notable exceptions. “There are dark clouds all around the globe, but the sun is shining on North America right now,” MacDonald says.