The Great Lakes-St. Lawrence region is a vital driver of North American economic output, employment and trade, accounting for roughly a third of combined Canadian and U.S. output, jobs and exports. The region’s economy has had a solid run, but is likely to moderate in 2019 as growth in most of North America fades back toward longer-run norms.
Overall, consumer spending and housing activity are slowing in latecycle fashion, while monetary and fiscal stimulus (particularly on the U.S. side of the border) is fading. On the Canadian side, firmer business investment in Central Canada would act as a buffer.
Against that backdrop, U.S. economic growth is forecast to decelerate to 2.4 per cent this calendar year, down from a 2.9 per cent pace in 2018. Growth in the second half of the year should be running around 2 per cent. Canada is expected to moderate to 1.8 per cent, a second consecutive leg down after a 3.0 per cent surge in 2017. Central Canada is cooling with growth in both Ontario and Quebec expected to soften this year, but broader economic conditions in these provinces remain historically strong. Most U.S. states in the Great Lakes-St. Lawrence Region are also expected to moderate after a surge in business confidence and higher investment lifted growth over the past two years. For the region overall, we expect 1.9 per cent real GDP growth in 2019, versus 2.2 per cent last year.
Trade tensions are perhaps the most important factor heading into 2019, given that the Great Lakes-St. Lawrence region accounts for more than half of all Canada-U.S. cross-border trade. While it still has to pass through Congress, the USMCA deal removes a major cloud of uncertainty frommthe business sector. Ontario business confidence could benefit the most, with nearly 83 per cent of shipments from the province flowing south of the border. Meantime, the steel and aluminum tariffs have had some impact in the sector, but not enough to hurt Quebec’s (a large producer) economy more broadly. The trade dispute with China is the bigger issue for the region, especially on the U.S. side.
Some firms in agriculture have been directly impacted by tariffs; others in manufacturing have faced higher steel input costs. Interestingly, cargo volumes on the St. Lawrence have benefited from the Canada-Europe trade deal, and some rerouting of supply in the wake of U.S.-China tariffs—2018 volumes rose to the highest level since 2007.
Auto Sales Down
The auto sector has softened, with U.S. sales levelling off around the 17.5 mln annualized level. While this is a strong level, consumer demand has clearly run into some late-cycle constraints. Meantime, Canadian sales have retreated from record highs, posting the first annual decline in 2018 since the Great Recession. As a result, overall North American production dipped for a second consecutive year in 2018, and we expect continued softness this year. Part of this reflects late-cycle dynamics, while part reflects an ongoing structural shift in production away from Ontario and the Midwest, toward the Southern U.S. states and Mexico—GM’s Oshawa closure is a prime example. Broader factory activity has ebbed as well, consistent with much of the sector cooling after a strong run through 2017 and 2018. Indeed, regional manufacturing surveys in Chicago and Milwaukee have shifted down from cycle-high readings for new orders and employment, suggesting more moderate growth this year.
Housing Market Cooling
The housing market is cooling on both sides of the border. In the U.S., higher mortgage rates, fading pentup demand and tax reform that has increased the after-tax cost of homeownership for most buyers have weighed broadly across most markets. Homebuilders have reported less traffic, but resale home price growth continues in the low single-digit range.
Meantime, Toronto’s market continues to absorb the impact of Bank of Canada rate hikes, the provincial government’s Fair Housing Plan and stricter federal mortgage rules that took effect at the start of 2018. Demographic and job-market fundamentals across Southern Ontario remain strong, however, and prices have stabilized. Montreal arguably now boasts the strongest market in the region (London and Windsor are making a bid too), with a solid job market and increased nonresident interest driving 6 per cent price growth. All told, the longevity of the housing cycle could well be determined by how much interest rates rise from here—we currently expect two rate hikes from each of the Federal Reserve and Bank of Canada in 2019.