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Three key challenges for Canada’s economy in 2014

A container ship prepares to pass underneath the Lions Gate Bridge in this file photo.

rafal gerszak The Globe and Mail

Canadian economic issues to watch in 2014

After a sluggish 2013, the Canadian economy faces major challenges in the year ahead. Here are three issues we'll be watching closely as bellwethers for the economy's prospects.

Will exports and investment boost Canadian economic growth?

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If we held an economic "airing of grievances" (in the Seinfeld-inspired "Festivus" tradition), the Bank of Canada would surely express their disappointment that growth is stuck in neutral, once again significantly underperforming expectations. The main culprits are weak Canadian exports and investment (see graphic), which means that for growth to accelerate in 2014, added strength in these two areas will be critical.

The other components of Canada's gross domestic product offer little potential upside. Highly-leveraged households are spending cautiously, the housing sector is slowing, and governments are restraining spending to balance budgets over the medium-term. Businesses generally have strong balance sheets but are delaying investments to expand their production capacities because of inadequate demand. Canada's ongoing competitiveness challenges also remain a big concern, as seen by our declining share of global export markets in the past decade.

Exports matter not only because there are plenty of jobs at stake (the government calculates that up to 20 per cent of Canadian jobs are linked to exports) but because a large body of research finds that businesses active in foreign markets tend to be more productive, more skill– and capital-intensive, and pay higher wages. The key question is whether they can grow in the fiercely competitive global economy.

One reason for optimism is the recent spate of good news on the trade front, which could provide a boost beyond 2014. This includes the recently-announced trade deal with the European Union (CETA), as well as the much narrower focus on "economic diplomacy" of Canada's foreign policy. The latter includes a target to increase the share of Canadian small and medium-sized businesses in emerging markets (up from 29 per cent today to 50 per cent by 2018). And in December, the World Trade Organization finally reached its first global trade agreement in nearly two decades, while momentum is growing in mega-regional talks like the Trans-Pacific Partnership, which involves Canada.

How will "demand-oriented" Employment Insurance and the Canada Job Grant work?

This past year saw considerable debate over the issue of potential skill gaps and concerns about the efficacy of training in the Canadian labour market. The coming year will provide a better sense of the federal government's moves to reform labour market policy – particularly the controversial Canada Job Grant – as negotiations over the next round of federal-provincial labour market agreements conclude by March.

While public attention focused on the Job Grant, Ottawa's push to make Employment Insurance (EI) and its related employment support programs more "demand oriented" is potentially more consequential. For one thing, a lot more money is at stake; $2-billion is spent annually on Labour Market Development Agreements (LMDA), which provide a series of training and re-employment supports to EI-eligible clients.

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Redesigning our "active labour market measures" is also potentially historic. For the first time since administrative responsibility for LMDA programs began to be devolved to the provinces in the 1990s, we have an opportunity to comprehensively examine how programs support the needs of Canadians and employers. In an environment of sluggish aggregate demand, it's crucial to effectively help the 1.3 million unemployed Canadians find work, as well as address the skill development needs of the employed.

What "demand oriented" means in policy terms is unclear at this point. Hopefully, it signals a desire to determine what policies work best for particular groups, and how we can improve the process of matching people to jobs. That would be a major step forward for evidence-informed policy in Canada.

Will the Keystone XL pipeline get U.S. approval?

It's often said that after the Congressional mid-term elections, a second-term President becomes a lame duck as attention turns to the next presidential campaign. Barack Obama approaches this milestone at the end of 2014. Having signalled his desire for concerted action on climate change and facing continuing pressure from some Democrats, the looming question is whether the President will give regulatory approval to the Keystone XL pipeline's cross-border leg, or whether the pipeline will fall victim to hisdesire to leave a legacy as an activist leader on climate change.

Keystone represents an important test for Canada's ability to expand market access for energy products in what has traditionally been our most-favoured foreign market. Though the project promises economic benefits on both sides of the border, the path to approval is complicated by several factors.

The rapid expansion of U.S. domestic oil and gas production in the last few years due to new technologies has intensified the competition facing Alberta's oil sands product. With it, the much-heralded goal of U.S. energy independence becomes potentially attainable. As John Podesta, Obama's incoming senior adviser on climate change issues argued in a 2012 op-ed in the Wall Street Journal, this creates a powerful opportunity for economic and climate interests to coalesce – at Keystone's expense. "We don't need more foreign oil and gas," he wrote. "We can safely assemble a collection of lower-carbon, affordable and abundant domestic energy assets that will dramatically improve our economy and our environment."

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Although the White House insists Mr. Podesta won't be formally advising on Keystone, his voice will be heard on the President's climate change agenda, of which Keystone is inextricably linked for some. This doesn't mean Keystone is doomed. But as Policy Options editor Bruce Wallace has noted, the path is much more complicated going into 2014, and its fate holds clues to the future of the North American energy infrastructure and the Canadian resource sector.

Tyler Meredith and Stephen Tapp are research directors at the Institute for Research on Public Policy. Follow them on Twitter @tylermeredith and @stephen_tapp.

1) Bank of Canada Forecasts for 2013 outcomes (contributions to average annual economic growth, percentage points)

2) Bank of Canada Forecasts for 2012 outcomes

Sources: Bank of Canada Monetary Policy Reports, October 2010, 2011 and 2013

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