Welcome to Canada!
Much recent focus of these blogs has been on the economy of the USA. In the end, where America goes, Canada will go. The emphasis on the USA in previous blogs is also a Canadian story. Nonetheless, what can we say about the Great White North in and of itself? A short economic primer follows.
The Good:
The Loonie. A Loonie below $0.75 US is great for the export-driven economy in Ontario, Canada's largest province. The short, medium and long term economic prospects for Central Canada are excellent when the Cdn Dollar is at these levels, as Canada's largest export market is in the USA. Ontario added 20,000 new jobs in January, 2016.
Tax Changes. Moving tax burden from the middle class to the rich makes solid economic sense. The theory that money given to the rich in the form of tax breaks generates economic growth that benefits the middle class and poor has been implemented since the late 1980's. The result has been a richer group of rich people, and a middle class and the poor who have seen incomes stagnate in real terms. The "trickle down" didn't. Time to spread the wealth around to those people who actually spend it, and who stimulate economic growth in so doing.
Legalization of Pot. The legalization of pot will bring in billions of dollars in hitherto untaxed revenue. This will go some way to addressing an increasingly serious federal government financial situation.
New Markets. The Trans Pacific Partnership agreement will open new markets to Canadian production. This should increase GDP in the medium to long run.
The Bad:
Investment. December saw more money leave Canadian markets than in any month in history. This puts pressure on the Loonie, but also pushes up bond yields just as the federal government is looking at running a deficit.
Productivity. Canadian productivity is at an index level of about 107 on an index that started at 100 in 2007. It actually declined for most of last year. The long run determinants of national wealth are population growth and productivity. We need to do better than an average productivity increase of only about 1% a year.
Federal and Provincial Finances. Canada isn't Greece, but public finances are in serious trouble. The federal government will run a deficit of well in excess of $10 Billion in the next fiscal year, and already has a net public debt of about $610 Billion. Ontario has a debt that will top $300 Billion next year. All told, net public debt in Canada is well over $1.2 Trillion, or over $35,000 for every person in the country. This is manageable, but a new serious economic downturn could push governments right to the wall, as there is little room to expand borrowing to respond to a future crisis with debt levels like this (Note - OEDC just slashed Canadian growth projections from 2% this year to 1.4%.)
Bank of Canada Policy. The BoC has been seriously incompetent in the management of monetary policy in this country. It should have raised rates years ago, and has waited so long to raise rates that we are now heading into a new down turn with very low rates, meaning it will have no room to maneuver when problems arise again. The BoC's monetary policy is also the Number 1 reason why personal debt levels are so high, as money has been close to free for seven years (see below). t has also forced retirees in to riskier investments as they cannot make much on their savings with super low interest rates.
Commodity Prices. Canadian and drawers of water and hewers of wood...still. The recent collapse in world commodity prices will hurt the extraction industry in Canada as China stops building cities with no one living there.
The Ugly:
Personal debt. Canadians now owe about 165% of their yearly salary in debt. They have never been more personally indebted. Any upturn in interest rates will cause very significant economic pain. Related to this...
The Housing Market. A massive chunk of this personal debt is in the form of low interest mortgages. There is no doubt that the largest housing markets in Canada - Vancouver and Toronto - are in bubble territory, with prices in Vancouver up 12.5% in the last 12 months, and those in Toronto up 8.5% over the same period. An imploding bubble will throw tens of thousands of construction workers out of work, driving the unemployment rate up markedly. This bubble will pop some day - they all pop eventually.
Oil Prices. The low price of oil is devastating the economy of Alberta. Until recently, the only real economic driver in the country, the province risks becoming an economic basket case, which would pull the entire country down. As noted in this blog, the price of oil is going to go up again soon as the OPEC nations and other restrict supply to drive up the price to avoid national bankruptcy. Until this happens, Alberta, and to some extent Saskatchewan, will continue to suffer.
