The Canadian economy is having considerable difficulty in generating stronger momentum. Domestically-driven activity is still quite resilient, with consumer spending and housing activity remaining relatively buoyant. However, the fundamental problem is the continuing weakness in exports and business investment - the sectors being counted upon to lead the expected revival in growth. This is particularly important to Canada since exports of goods & services account for about a third of GDP.

The fallout from the consolidation in the energy sector is still percolating through the producing provinces - primarily Alberta and Saskatchewan - though most regions are being affected by the weakness in demand for manufactured goods and business-related services. The persistent sluggishness in global economic activity, alongside the renewed slump in crude oil prices, point to further consolidation in Canada's large energy sector. Energy exports remain under pressure, profits are continuing to decline, investments are still contracting, and spending on related goods & services is being reduced.

Non-energy exports have been largely underperforming since late-2014 because of the continued slowdown internationally and, in particular, the sluggishness in U.S. spending through the early part of the year. The U.S. rebound has been slow to materialize, and the general operating environment is being compromised by the renewed global turbulence attributed to debt-related strains in a number of regions, and the uncertainty surrounding the continuing deceleration in China. U.S. import trends have remained soft through May, highlighting the hurdle to faster Canadian growth. Despite some increased geographic diversification, Canada's trade fortunes remain closely linked to U.S. developments, with about 75% of international shipments still destined south of the border, says Scotia View.

More recent data suggest that U.S. domestic demand is beginning to firm up, as evidenced by the upturn in auto sales, housing-related activity, continuing capital goods orders, and the confidence engendered by rising employment. This encouraging U.S. outlook, bolstered by a more competitive loonie and more integrated NAFTA-zone supply chains, should lead to stronger Canadian exports and domestic industrial activity going forward.

The aerospace industry has been Canada's export growth leader this year and is expected to continue to outperform, as global aircraft manufacturers continue to ramp up production to fill bulging order backlogs. Several Canadian aerospace companies are global leaders, while many others supply the world's two largest aircraft manufacturers. The start-up of production at Canada's largest auto assembly plant, following several months of retooling, will also buoy Canadian exports and industrial activity. The chemical industry is likely to continue to outperform, due to expansion in recent years, especially in pharmaceuticals. In addition, a stronger growth profile in the United States should benefit a number of Canadian sectors which have been lagging. The recent improved momentum in U.S. housing is expected to increasingly benefit the forestry and manufacturing sectors. More buoyant U.S. household spending should help lift shipments of Canadian consumer products and services, notes Scotia View.

For the time being, Canada's sub-par expansion is continuing to rely on consumer spending and housing expenditures. Domestic service-sector activity remains a relative bright spot, led by financial and other commercial services, as well as tourism. At the same time, infrastructure-related spending will help provide some timely support. Canadian households and businesses should also benefit from continued supportive conditions. Low inflation and energy prices are bolstering purchasing power. Borrowing costs are at historically low levels. Although currency trends have become increasingly volatile, the loonie will likely remain at a deep or potentially even deeper discount to the greenback.

An improving export performance remains key to a more positive economic outlook for Canada, especially since it would help take up the capacity needed to bolster business investment. A stronger and more sustainable U.S. rebound is paramount. A reduction in exogenous shocks caused by recurring geopolitical issues would also be supportive. So would a firming up in growth around the world, especially in the Asia-Pacific region, which would eventually lead to an end to the supply consolidation which is undercutting commodity prices and the terms of trade that are so important to Canadian export earnings.

During these challenging times, Canadian businesses should increase their investments in productivity-enhancing initiatives - machinery, technology, and training - which are critical to boosting international competitiveness. From a public policy perspective, Canada has the policy flexibility to affect change if needed. The Bank of Canada still has some manoeuvring room to implement more monetary accommodation, although another cut in the overnight rate may have only limited impact in helping to reinvigorate the lagging export and investment trends. And as one of a few major economies with a relatively healthy federal fiscal position, Ottawa has the flexibility to address some shortcomings if the expansion stalls, notes Scotia View.