Canadian economy was resilient in 2018, but troubling signs ahead

The Canadian economy entered 2018 on an unexpectedly impressive run, and will begin 2019 on a healthy note. But signs of weakness have raised a key question: How long before the good times end?

Through much of 2018, Canada's unemployment rate hovered near a 40-year low and job creation remained strong as the evidence pointed to an economy going at close to full tilt.

The handoff was a good one, too the country had posted three per cent growth for all of 2017, largely thanks to strong household spending. We'll have to wait a little for the final numbers, but forecasters say 2018 has likely delivered still-sturdy growth of about two per cent.

But as 2019 approaches, there are worries the solid economic expansion is starting to show its age.

Last month, the federal government's fall economic statement projected two per cent growth again for 2019, but many predict the number will likely come in lower following a recent drop in oil prices.

Jittery markets, uncertain U.S. outlook

In addition to the pullback in crude prices, experts point to jitters in the financial markets, predictions the American economy a key contributor to Canadian growth will start to cool off and the United Kingdom's difficult divorce from the European Union, which could ripple across the global economy.

There's also potential for an even bigger threat: an escalation of the trade war between Washington and Beijing.

On trade, Canada made it through a year filled with significant uncertainty, including the difficult negotiation and signing of an update to the North American Free Trade Agreement.

Many of the trade unknowns, however, will carry over into the new year. The road to NAFTA 2.0's ratification could bring more drama, punishing American steel and aluminum tariffs remain in place and the clash of superpowers between Canada's two biggest trading partners continues to play out.

"There are always reflections around the cyclical downturns that happen and, as I've said, the impacts of a trade war between China and the United States could have significant impacts on the global economy negative impacts on the global economy," Prime Minister Justin Trudeau said in a recent interview with The Canadian Press.

"We have to make sure that we are prepared for rough waters if we encounter them."

Rising rates, high household debt

In Canada, potential trouble spots include the combination of high household debt,rising interest rates and slowing wage growth that's been "terrible" for about half a year following a good pickup early in 2018, saidMatt Stewart, director of economics for the Conference Board of Canada.

Higher interest rates, Stewart added, have delivered a hit to household spending, which has been the primary driver of Canada's good economic fortunes.

"It's been a long time since we've had a recession," Stewart said. "As of yet, I think most of the news is still positive, but there is a growing amount of risks."

With overburdened consumers expected to take a breather, business investment is seen as the next critical source of growth. But Stewart said the transition has yet to materialize because investment has underperformed, likely due to competitiveness concerns. Businesses aren't sure whether Canada's the best place to put their money.

In an effort to boost investment, Ottawa announced billions of dollars worth of corporate tax incentives in its fall statement. Taxpayers will have to wait and see if the federal changes will be enough to encourage more companies to invest in Canada.

Craig Alexander, chief economist of Deloitte, said the economy will continue to have healthy growth in 2019, but notedit's due for some moderation.

Late stages of business cycle

"We are in the late stages of a business cycle," he said. "That doesn't mean that a recession is around the corner, but we need to recognize that we're 10 years into an economic recovery, expansion. Business cycles are typically eight to 10 years long."

Alexander said markets are probably overreacting to the possibility that another downturn could be almost upon us. He thinks the more likely case is that growth will continue to slow.

The economy's evolution will have different impacts depending where one lives, he added.

For example, the energy sector faces big challenges.

Part of it comes from the recent plunge in oil prices, but there's also been an extra discount on the price of western Canadian crude caused by transportation bottlenecks out of the Alberta oilpatch.

"This is sad news for Alberta," Alexander said. "They've only barely recovered from the last recession."

Ottawa offered assistance this month in the form of a $1.6-billion aid package to support oil and gas companies.

Alberta, however, wants federal help to move its oil to new markets.

Loss of GM plant

Ontario's industrial sector will also face a big hurdle in 2019. General Motors has announced plans to shutter its plant in Oshawa later in the year,a move that would put 2,500 people out of work and inflict economic pain on the region.

Bank of Montreal chief economist Doug Porter said Canada already took a small step back in 2018 and he expects growth to slow further.

"Just looking at financial markets,there's obviously a lot of concern that we are getting to a late stage of the [economic]cycle," Porter said. "We don't believe that recession risks are especially high at this point, but we do think the North American economy will cool in 2019."