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U.S. “fiscal cliff” could hamper Canadian manufacturing: Study

The economies in Quebec and Ontario could be in for a rough ride, as their manufacturing sectors are predicted to suffer for a few more quarters due to the negative impact of the U.S. fiscal cliff, a new report says.

According to the Desjardins Group Economic Studies team, international financial markets are still sensitive to any unexpected event. The relative equilibrium that had materialized over the last few months proved quite fragile. “The fiscal cliff saga in the United States should wrap up soon, removing a major source of uncertainty. The extent of the impact on North America’s economy and the reaction from the markets will depend on the outcome,” said François Dupuis, Desjardins Group vice president and chief economist.

The report found that Canada’s economy is increasingly feeling the impact of the weakness in global demand and movement by exports provides firm evidence of this trend.

The report also says the current environment is less favourable to Canada’s economy. Canada’s real GDP should rise by 2.0 per cent in 2012 and 1.8 per cent in 2013, and then close in on potential in 2014 with growth of 2.5 per cent. Commodities, especially oil, remain a major driver for Canada’s economy, largely explaining the regional disparities. Western provinces will once again be the best performers in 2013 and 2014.

The context in Quebec and Ontario will remain tough, the report added, as these provinces do not benefit as much from the presence of energy commodities. Their manufacturing sectors, heavily focused on international merchandise trade, will continue to hurt for a few more quarters due to negative impacts of the U.S. fiscal cliff and the recession in the euro zone. The Canadian dollar will gradually undergo upside pressures and could hit US$1.05 towards the end of 2014. On the other hand, the Loonie’s relative strength should encourage businesses to keep investing to improve sometimes lacklustre productivity.

Quebec can expect real GDP to grow by 1.4 per cent in 2013, the report added. Ontario should feel the backlash from the big surge in automotive production in 2012, showing real GDP growth of just 1.7 per cent in 2013. Economic growth will climb to 2.2 per cent in Quebec and to 2.3  per cent in Ontario in 2014, helped by the global recovery, especially in the United States.