Similar to the outlook for the U.S. economy in 2019, the Canadian economy is expected to grow, but at a slower pace.
"The Canadian economy will remain solid in 2019 and will likely continue to expand at about 2 percent. It signals that the country is using current capital and labor at close to full capacity," according to Pierre Cleroux, vice president, research and chief economist at the Business Development Bank of Canada (BDC).
The BDC estimated a 2.1-percent growth rate for the Canadian economy in 2018, compared with 3 percent in 2017.
A slowdown in economic growth is a healthy occurrence, according Deloitte Canada, given that the economy has little domestic slack with the unemployment rate hovering at a nearly four-decade low and capacity utilization at high levels.
"Softening economic growth will also reflect a shift in the main drivers of expansion. Domestic demand growth is poised to diminish because consumers and real estate can no longer drive growth as they have in the past. This means that exports and business investment will be more important contributors to economic growth," Craig Alexander, chief economist and partner, Deloitte Canada, said.
Deloitte noted that the U.S. Mexico Canada Agreement (USMCA), the tentative free trade deal involving the U.S., Mexico and Canada, lifts a cloud of uncertainty that posed a downside risk to its outlook and it should help boost exports and investment.
The U.S. and Canadian economies generally move in concert, but they are not in tune right now, according to The Conference Board of Canada. While tax cuts fueled a consumer-led boom in the U.S., rising interest rates and falling housing prices are causing a pullback in the pace of consumer spending and overall economic growth in Canada.
The Canadian dollar, the "loonie," is expected to continue to trade within a range of 75 to 80 cents against the U.S. dollar in 2019, according to the BDC.
Meanwhile, the energy-producing regions of the country are coping with low oil prices and the manufacturing sector is facing the prospect of further job losses and a pullback in investment, according to the Board.
"A combination of rising interest rates, tightening regulation, weaker household spending and demographics will temper the growth outlook for the housing market through 2019 and 2020. However, prices are expected to stay high and affordability remains a concern," the Board said.
As in the U.S., an aging workforce and new technology are transforming the Canadian business landscape.
"As Canada's baby boomers are heading to retirement, the growth of Canada's working age population will remain below 0.2 percent (in 2019) and the decade to come," Mr. Cleroux said.
A BDC study found out that around 40 percent of Canadian small and medium-sized businesses are struggling to find people to fill job positions. This limits business growth and will eventually impact the economy, so business owners need to get creative to find the talent they need to continue to remain competitive, Mr. Cleroux said.
Deloitte said demographics is distorting the historical unemployment figures — the Canadian unemployment rate hit a 40-year low of 5.8 percent in the first half of 2018 — since an aging population tends to lower the measure of the unemployment rate.
While tight labor markets can fuel inflation through rising wages that get passed along to consumers, Deloitte claimed this does not appear to be the case in Canada. From January to May, overall wages increased 3.9 percent, compared with the year-ago period. However, from May to September, wages increased only 2.2 percent.
"Sustained low unemployment should ultimately bid up wages and this is why the Bank of Canada will need to gradually tighten monetary policy," Mr. Alexander said.
Strong job creation, declining unemployment, rising personal income gains, low interest rates and strong real estate markets have helped to keep consumer wallets open, according to Deloitte, which expects consumers to continue their spending, but at a moderate pace.
Consumers are expected to constrain their debt growth in 2019 as rising interest rates lift debt-servicing costs, Deloitte added, predicting personal consumption growth will fall to 1.8 percent in 2019, after an expected increase of 2.2 percent in 2018, and continue to decrease to 1.4 percent in 2020.
"This will weigh on aggregate economic growth because consumption is more than half of the economy, as measured by gross domestic product," Mr. Alexander said.
Household spending has been driving economic growth over the last several years but will ease in the face of high household debt loads, rising interest rates and soft wage growth, according to the Board.
Meanwhile, business investment in machinery and equipment stalled in the second quarter of 2018, Deloitte said, but capacity pressures should encourage businesses to invest more.
Deloitte predicted investment spending in machinery and equipment would increase about 8 percent in 2018 but that growth would slow to around 3.2 percent in 2019 and to 2.4 percent in 2020.