Economists, business heads and industry insiders remain optimistic that 2017 will be a positive year for economic growth and international trade. Based on economic indicators and business surveys, the international business outlook for the remainder of the year is overwhelmingly positive on the heels of a lethargic 2016.

Economic indicators improve

In both Canada and the United States, 2016 was a lackluster year for growth in the economy and in international trade. Canada’s GDP grew by only 1.3%%, while the United States’ GDP grew at 1.9%. Canada’s GDP growth forecast for 2017, however, is projected at 2%, and the United States’ GDP is projected to grow 2.1 %.

That puts both countries’ GDPs on pace to see a healthy rate of growth — high enough to mark significant economic upswing but low enough to avoid overconfidence by investors and consumers.

Both countries expect to see continued modest declines in their unemployment rates. In Canada, unemployment is expected to continue its downward trend from the 7% market. In the United States, the unemployment rate is expected to drop to 4.5% by the end of 2017, from 4.7% at the end of 2016. Both countries predict low and steady inflation for 2017. In the U.S., inflation is expected to be 1.9%, while it is expected to be 2.2% in Canada. Both the U.S. Federal Reserve and the Bank of Canada aim to keep inflation rates around the 2-% mark.

In both countries, other economic indicators are pointing to a positive economic outlook for 2017. Oil prices have stabilized. There have been growth gains in manufacturing and exports. And consumer confidence rates are high.

Businesses optimistic about future

With economic indicators looking up, businesses are feeling optimistic about their expectations for 2017. Surveys in both Canada and the United States show that retailers, manufacturers, and importers and exporters expect that they will see their sales numbers improve this year.

Canadian business firms reported that sales were relatively flat for the last 12 months, according to the Bank of Canada’s Spring 2017 Business Outlook Survey, but the 100 business firms surveyed by the bank said they are seeing an uptick in domestic sales that have them predicting stronger growth this year. Firms also reported that they are seeing strong international demand for their goods, leading to expectations for a positive year in exports. The results of EDC’s most recent Trade Confidence Survey, showed a dip in exporters’ confidence levels for the upcoming year, but it still remained strong.

In all, 94% of exporters reported that they expected their business to grow or remain steady for 2017, and 49% said they plan to expand their business to new markets within the next two years.

U.S. business forecaster Kiplinger also reported that they expect to see some positive business gains in 2017. With consumer confidence up, Kiplinger forecasted that retail sales will grow by 4.2%. With the uptick in sales and decrease in overstock, businesses also will show confidence by increasing their spending on machinery and equipment; It is also forecasted that business investment will grow by 3 to 4 % this year. There is concern about the U.S. trade deficit, which is expected to continue to year by an additional 4%. However, economic groups, from including the U.S. Chamber of Commerce, express optimism that U.S. Pres. Donald Trump’s “America First” policies and determination to renegotiate trade deals will lead to a stronger export environment.

2017 expected to outpace “sluggish” 2016

Economists and business leaders in Canada and the United States universally talk about 2016’s “sluggish” growth numbers. The good news for businesses hoping to grow their sales and exports in 2017 is that those same economists and business leaders overwhelmingly believe that this year’s growth will be modest but strong. This year’s upward swing will help to put the relatively stagnant numbers of the last few years in the past.

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The Crystal Ball Report examines the most significant economic, political and technological issues facing Canadian business in order to forecast critical opportunities and challenges in the years ahead. This report is the culmination of extensive research and input from businesses across Canada and from the global experts who helped us gaze into the crystal ball.

Recent reports state that China’s economy is showing signs of improvement, after a volatile few years for Canada’s second largest trading partner. However, China continues to face major economic challenges, contributing to what is largely considered to be an unsustainable growth rate.

The Canadian Chamber of Commerce’s Crystal Ball Report, released in January, asserts that China will remain one of the world’s biggest contributors to global growth in 2016-2017. Unfortunately, the fact that China is such a major player in the world’s economy means that a slowdown in the region will have an impact worldwide.

Naturally, Canada’s exporters will feel the hit from a downturn in demand from the world’s biggest commodity consumer.

According to Jill MacLeod, Regional Chair for Canada with Cornerstone International Group:

“Canada’s economy is also directly affected by what is happening in China, where a weaker appetite for resources is depressing prices for oil, coal, copper and many of the key commodities that dominate this country’s exports and investments.”

China’s challenges:

“The big challenge for China is that it has to reform everything at the same time,” explains Mark Zandi, Chief Economist for Moody’s Analytics.

From an export-led economy to a consumer-driven one. From state-owned enterprises dominating to the private sector taking over. From a state-controlled financial system to market-driven banks. From a pegged currency to an open capital account. This is a tall order.

The Crystal Ball Report cites three major challenges for China’s economy this year: skyrocketing debt, a slowing growth rate, and an overheated housing market.

1. China’s debt has nearly quadruples since 2007, from $7 trillion to $28 trillion in 2014

The nation’s debt has risen to 282% of the GDP as China has increasingly used credit to fuel its growth. This staggering debt is now larger than the U.S. and Germany’s total credit. What has caused this dramatic increase in the country’s debt load? Over half of it is tied up in loans associated with China’s overvalued housing market.

2. China’s property market shows signs of massive oversupply

The country’s unsold home inventory reached an all-time high of almost 70 million homes, up 17.8% from the previous year. This represents almost 700 million square metres of unsold properties; a new record for China’s housing market. After prices fell for almost 18 months straight, the government took steps to stabilize the mortgage market.

Stimulus efforts began in 2014, and have recently expanded to included reductions to minimum required down payments for first and second time home buyers. More stimulus measures are expected this year as well, including interest rate cuts and lowering banks’ reserve requirements.

3. Steadily declining growth rate

Exports out of China are not expected to maintain their current rate due to the slowing global economy and a less competitive labour market. The projected GDP growth has dropped to 6.5% in 2016, followed by 6% in 2017.

This decrease represents a slowdown, from 10.4% in 2010, but not a crash.

China’s government has the tools to intervene before a dramatic crash happens, such as a $3.5 trillion foreign exchange reserve.

The forecasted continued lowering of interest rates throughout 2016 will contribute to a modest depreciation in the RMB. It’s possible that we could see a 10% depreciation in the renminbi, bringing it back to where it was in 2011.

Growing middle class means stress on resources (but opportunities for exporters to China)

Despite China’s economic challenges, every year, 30 million people are added to China’s middle class. As this segment of the population increases, so will the need to spend on cities, roads, power grids, and other infrastructure. This is a great opportunity for exporters, as demand for commodities and services increase in the world’s biggest market.

Chinese citizens typically save a much higher percentage of their income than North Americans. Though the country’s average wage savings rate is a staggering 32%, even a small increase in spending would have a huge impact on the economy from consumption.

The bottom line for Canadian exporters is to be cautious but optimistic. Though China’s slowdown continues to have an impact on business worldwide, there is potential for an increase in demand and spending in some areas, particularly in services.

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