Canada's economy is set to slow down even with a NAFTA deal, economists say

Much has been said about the importance of a trade deal with the U.S. for the Canadian economy, as officials from both sides of the border continue to try to hash outa new agreement.

But, even if a new NAFTA deal is reached, it will notprevent the Canadian economy from slowing down from the robust growth it hasseen recently, economists said.

Royce Mendes, senior economist at CIBCCapital Markets, forecasts that gross domestic product (GDP) growth will fall to 1.8 per cent next year, and then drop to 1.3 per cent growthin 2020.

That compares to an expectedtwo per centgrowth rate this year, according to the Bank of Canada. The economy grew a strong three per cent last year.

Household spending

"Our research finds that even with a NAFTA deal in place, the long-desired rotation in growth towards exports and business investment will be sluggish and won't offset the coming slowdown in household spending and housing activity," Mendes said in a note on Thursday.

Rising interest interest rates will hold consumers backfrom spending and make housing affordability even more costly, he said.

"As we've stated before though, that doesn't mean higher interest rates will break consumers' backs.With the unemployment rate expected to hover around six per centover the next couple of years, households, in general, should be able to service their debt loads," Mendes said. "It will, however, leave fewer dollars for discretionary purchases."

The Bank of Canada is widely expected to raise interest ratesfor a fifth time next month since it began its hiking cycle in July of last year.

Export surge a 'flash in the pan'

Added to that, Mendes said new headwinds, such as the U.S. becoming more aggressive in imposing tariffs on Canadian exportswith the current NAFTAdeal still in place, representa red flag for capital investment in Canada.

"Without healthy business investment, we also can't expect exports to become an engine for economic growth," Mendes said."Last quarter's export surge was nothing more than a flash in the pan, in part due to U.S. buyers front running their own country's tariffs."

Government data last week showed that the economy grew a solid 2.9 per cent in the second quarterof this year thanks to exports, which surged to their biggest increase in four years.

Sal Guatieri,senior economist at BMOCapital Markets, is also expecting growth next year to slow to 1.8 per cent, as reduced consumer spending and housing activity will weigh on growth.

But, he is forecasting a higher number than Mendesfor 2020 at 1.6 per cent.

"A NAFTA deal is assumed in our base case forecast.It could raise investment and support growth somewhat," Guatieri said.

RBCsenior economist Nathan Janzensaid the bank doesn't publish forecasts for 2020, but agrees that growth is shifting lower.

Economists at TD Bank, meanwhile,said they were in the process of updating their growth forecasts, but think growth will likely be a bit higher than what CIBC is suggesting.

"We do expect a more modest pace of consumer spending going forward, and while housing activity should remain a contributor to growth, this sector as well should see more modest growth relative to the past," said Brian DePratto, senior economist at TD Bank.

In terms of NAFTA, Deprattosaida resolution should be positive for Canada. However, he said a deal is "more about preserving the gains that we already have" rather than "adding markedly to the economy."