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.