Never mind NAFTA, what is the outlook for plastics in Canada?

The U.S. and Canadian economies have always been strongly correlated, but their growth patterns will diverge in the next few years. This will be due in large part to a difference in consumer spending power. Consumer spending in Canada is past its cyclical peak in growth, and it will decelerate over the next two years. Consumer spending in the U.S. will continue to get a boost from tax cuts and rising wages, and it will accelerate moderately in 2018 and 2019.

My latest forecast calls for real GDP in Canada to expand 2.3 percent in 2018. This is moderately higher than the trend of the past few years, which has averaged right around 2 percent per year. The negative effects of the trade dispute with the United States in the first half of this year will turn positive by year's end after a deal is signed and the Canadian economy can catch some of the tailwind caused by accelerating growth in the United States.

In terms of the percentage of disposable income, Canadian households have much higher levels of debt outstanding than their American counterparts, and the trend is rising. Conversely, the savings rate for Canadian households is much lower than it is in the U.S., and it is trending lower.

Stronger household balance sheets will result in a faster pace of GDP growth in the U.S. through 2019, where the gain in the overall economy is expected to be close to 3 percent per year. Canada's economy will register growth of just under 2 percent per year overall.

One segment of the second-quarter data out of Canada that was disappointing was investment in capital goods. After growing by more than 16 percent in the first quarter, investment in machinery and equipment posted a meager rise of 1 percent in Q2.

The question for the machinery sector, especially suppliers of plastics machinery, going forward is this: Was the weak performance in the second quarter just a short-term payback for the excessive strength in the first quarter, which means the trend will fall somewhere between these two extremes in the second half of this year? Or was the drop in the second quarter the beginning of a new trend downward in spending on machinery for the foreseeable future?

In both the U.S. and Canada, there is evidence to suggest that the rate of investment in plastics machinery during the past few years has outpaced market demand for plastics products, and the industry may now be faced with the problem of excess production capacity.

Despite the expectations of growth in the overall economies, we may be past the cyclical peak in equipment demand for the current business cycle, and we will soon be entering a contractionary phase for the equipment sector. This would not be the first time that the plastics machinery industry suffered a recession while the overall economy posted gains. Suppliers to these markets should closely monitor the data in the next few months to determine if a downtrend is confirmed.

I believe this question about plastics product demand growth vs. production capacity will ultimately prove more relevant next year than the current worries about the trade dispute between the U.S. and Canada. I admit to being more than a little entertained by all the high-stakes, political intrigue emanating from the recent trade dispute. Each side has been rigorously coached about what to say to the media, or even what to leak to the media.

To become better informed of the pending economic consequences, I have tried to investigate the areas of disagreement between the two sides. This means I may be only slightly more informed than the average interested bystander, but I really cannot find anything of substance in this dispute. Apparently, the most contentious issue between these two countries is the 270 percent tariff Canada imposes on imports of U.S.-made milk powder.

Now, 270 percent sounds like a big tariff, but is all this rhetoric and posturing and uncertainty just because of an argument over the milk powder market? You would have to be in the reality TV production business to make this stuff up.

This may not seem like such a big deal on the surface, but it is an election year in both countries. Wisconsin dairy farmers were strong supporters of President Donald Trump, and the Canadian dairy farmers have a pretty strong lobby in Ottawa. So here we are in a tiff with our closest ally and neighbor that could have serious implications — positive and negative — for many segments of the plastics industry.

I swore off making political predictions a long time ago because I have all I can handle trying to make sense of the economy. Nevertheless, there is a lot more at stake here for Canada than there is for the United States. Trade with America accounts for a substantial portion of their GDP, and there is little doubt that Trump is leveraging the asymmetric risks that are strongly tilted in favor of the U.S. Canadians are strong and resourceful, but they need a trade deal a lot more than the U.S.

Canada is America's second-largest export market — the European Union is slightly larger — therefore, I believe the strongest probability is that all of this will be resolved soon, and a trade deal will get signed. I am not guaranteeing anything, but there is way too much at stake to believe otherwise.