Look for a little more economic drama for Canada in 2014

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If 2013 was the year of "modest" – moderate economic growth, modest job gains and mild-to-non-existent inflation – next year should bring a little more drama.

Canada's economy grew by about 1.7 per cent in 2013, the second year in a row of tepid growth that disappointed most forecasters. Next year, if their crystal balls are any indication, growth should accelerate to 2.3 per cent.

Several engines should rev up. Global economic activity is expected to strengthen, with U.S. demand along with better prospects in Europe and emerging economies buoying Canadian exports. At the same time, improving confidence and corporate profits should spur business investment.

"We're quite hopeful," though many risks remain, said Pedro Antunes, director of national and provincial forecasts for the Conference Board of Canada. The chief reason for his optimism? The view that the U.S. economy will soon start "firing on all cylinders."

Exports

The domestic side of Canada's economy – consumers, housing and government spending – has for years underpinned growth. As that activity subsides, prognosticators at the Bank of Canada and other economists have long believed trade and business investment will pick up the baton. That hand-off didn't happen last year, as both exports and investment disappointed. But it's expected to take place in 2014.

The United States is key to that assumption. As its economy moves into sturdier ground, the American appetite will grow for Made-in-Canada building materials, cars, machinery and industrial equipment, stimulating exports from Ontario, Quebec and British Columbia, Royal Bank of Canada says.

For now, Canada's export sector remains the only component of economic growth "that has not returned to its pre-recession level of activity," reflecting competitiveness challenges and a slow recovery in the U.S., the top destination for Canadian exports, TD's economists noted.

Gross domestic product

Economists' forecasts for 2014 vary considerably. At the high end, Deutsche Bank pegs growth at 2.9 per cent. On the pessimistic side, Capital Economics sees Canada's annual GDP at just 1.5 per cent while Merrill Lynch has pencilled in 1.8 per cent.

The main speed bumps over the next few years are restrained government spending and a slowdown in residential construction, said University of Toronto economists Peter Dungan and Steve Murphy.

Inflation

Inflation was all but dead this year, in Canada and many advanced economies. The annual inflation rate of just 1 per cent is the slowest since the recession and was weaker than virtually anyone predicted, dampened by weak commodity prices and sluggish demand.

Economists don't see it flaring up this year, with an average forecast of 1.5 per cent. With the outlook this low, it is "difficult to envision key rate hikes in the U.S. or Canada before September, 2015," noted Desjardins chief economist François Dupuis. "We can therefore rule out this threat to recovery."

Employment

Economists do not predict any burst of hiring. Job growth is expected to continue at a slow-but-steady pace, and Canada's jobless rate, which averaged 7.1 per cent, is expected to ebb to 6.8 per cent next year. But the U of T researchers don't expect to see the jobless rate return to pre-recession levels of 6.2 per cent until 2017.

Employment in Canada is pivoting away from manufacturing jobs, many of which are being replaced by automation, and shifting toward services. The number of factory job losses in the past decade is roughly equivalent to the growth of positions in professional services such as accounting and engineering, says the Conference Board's Mr. Antunes.

"It's a bit of a pipe dream to think that we are going to be competitive in labour-intensive manufacturing like we had in the past. We need to focus on where we have comparative advantages – on the high skills end" with statisticians, mathematicians, engineers and robotics experts in greater demand, Mr. Antunes said.

The loonie

As for the Canadian dollar, which began 2013 trading around parity before dwindling to the 94-cent (U.S.) mark by year's end, strategists see further weakness ahead. TD sees it fading to below 90 cents in the next two years, pulled down by the outlook for slow growth and low inflation.

The provinces

Among provinces, the Prairies – namely Alberta – are seen leading growth again next year. In fact, Alberta has been the single largest contributor to growth in Canada for the past three years, according to the Conference Board. With brighter export prospects, the disparity between strength in one region (the West) and relative weakness elsewhere (the East) should narrow next year, RBC says.

Activity in Canada is expected to lag the U.S. in the coming years. But next year will also be one of adjusting to a new normal – with growth rates of around 2 per cent much slower than they were before the recession.

"We're in a different world," Mr. Antunes said. "We shouldn't be disappointed because we're not going to see 3 per cent."