THE LEADERS - Canada's Economy

Canada's Economy on Mend,

but Don't Uncork the Champagne Yet

BY ALEX CARRICK, CHIEF ECONOMIST, CONSTRUCTCONNECT

In the past ten years, there have been two defining moments for Canada’s economy.

 

The first, of course, was the Great Recession. While it had a devastating impact throughout much of the world,

its duration and severity in Canada were considerably less than in the U.S. and Europe.

 

The U.S. decline in gross domestic product (GDP) extended through six quarters, lasting from early 2008 to the

mid-point of 2009. Canada’s pullback was a shorter three quarters, from Q4 2008 through Q2 2009.

 

The downturn originated in the financial sector. Debt instruments based on sub-prime mortgages crumbled.

Foreclosures proliferated and a credit crunch ensued. U.S. housing starts plunged 80% from peak to trough.

 

The contagion spread to Europe and was exacerbated by a government debt crisis in Greece that took years to sort

out. It has still not been totally resolved, with civil unrest continuing in opposition to belt tightening imposed by foreign lenders.

 

Canada’s banking system held firm. Canadian housing starts softened, but to nothing like the same degree as in

America. The Canadian economy was sustained by ongoing resource project construction and by a massive infrastructure building program initiated by the federal government, in partnership with the provinces and municipalities.

 

The second watershed moment for Canada occurred in the summer of 2014, when Saudi Arabia abandoned its supply

management role in the pricing of oil. The Saudi goal was to halt the rapid expansion of ‘tight oil’ production in the

U.S.

 

Advances in hydraulic fracturing were greatly expanding North American fossil fuel production. (Hydraulic fracturing

releases hydrocarbons by drilling horizontally as well as vertically to break up shale rock through the high-pressure

insertion of water and chemicals)

 

The world price of oil swung from a high near $140 USD per barrel to a low close to $30. Canada’s oil sector, based

mostly in Alberta, but also important in Newfoundland/Labrador and Saskatchewan, sank into a devastating funk.

Major capital spending was placed on hold or cancelled.

 

At the same time, other commodity markets crucial for Canada also fell into decline. The drop in world trade and the

weakening in prices for raw materials undercut one of the chief pillars supporting Canada’s growth, mega resource sector construction projects.

 

Moving into the back half of 2017, it appears that a corner has finally been turned. Not only is world trade beginning

to firm up again, which is helping to lift commodity prices (e.g., the price of oil has moved up to between $45 and

$50 USD), but the Canadian economy has also been embracing alternative spurs to growth, particularly in the hightech

sphere.

 

Whereas Canada versus U.S. GDP growth fell far short in 2015 (i.e., +0.9% versus +2.6%), then rose to almost par in

2016 (+1.5% compared with +1.6%), it will bound ahead in 2017 (+2.6% relative to +2.2% if current estimates hold.)

As calculated by the International Monetary Fund (IMF), Canada’s year-over- year GDP growth in 2017 will lead

all industrialized nations. The unemployment rate in Canada, currently 6.3%, is at its lowest level in nearly a

decade.

 

With respect to year-over-year net new jobs creation, Canada is presently outpacing the U.S. +2.1% to +1.5%. In

sub-sectors, Canada is leading in services (+2.2% versus +1.7%) and manufacturing (+3.2% versus +0.5%), but is

a stride behind in construction (+1.9% versus +2.8%).

 

Worth noting are some other employment categories where year-over-year jobs growth in Canada has been exceptional: ‘electronic shopping’ (+13.6%); ‘computer systems and design services’ (+9.9%); ‘movies, videos and music production’ (+6.8%); and ‘community care for the elderly’ (+6.0%).

 

 

 

 

The latter ties to an often talked about demographic trend, the aging population. The post-World War II baby boom generation, born from the mid-40s through the mid-60s of last century, has spent a great many years on life’s roller coaster.

 

Canada is fortunate, though, in having a healthy rate of population increase. A +1.2% per year gain in resident

count is the equivalent of adding a new city the size of Halifax every 12 months. The positive implications for

construction activity can readily be imagined.

 

If the +1.2% figure can be maintained, Canada’s total population will climb above 40.0 million by 2025. The

country’s present population level is 36.6 million.

 

In any given year, between two-thirds and three-quarters of the nation’s population increase comes from immigration.

History has shown that an influx of young people is a boon to GDP growth. The more people there are, the more the consumer spending that occurs.

 

(The U.S., on the other hand, is currently adopting numerous measures that diverge from economic orthodoxy. Planning is afoot to cut legal immigration south of the border from one million per year to about half that level.)

 

Canada’s economy is on the comeback trail, but too many uncertainties warn against breaking out the ‘bubbly’ just yet.

Most important, there are crucial foreign trade issues (e.g., NAFTA; softwood lumber; marketing boards in dairy and

poultry) to be resolved with the new and unpredictable administration in Washington.

 

The retail sector is a corner of the Canadian economy that is doing remarkably well. Shopkeeper receipts of +7.3%

year over year are above and beyond the +5.0% that is normally considered commendable. Motor vehicle and parts sales are +9.6% year over year. Sales volumes of Canadian motor vehicles in dollars and units have been setting new all-time highs.

 

Several other Canadian retail sub-sectors have been recording extraordinary year-over-year advances: ‘furniture and

home furnishing’ stores, +7.0%; ‘electronics and appliance’ stores, +11.5%; and ‘building material and garden equipment’ suppliers, +17.4%.

 

With Canada being so dependent on foreign trade, it’s encouraging to see the improvement in year-to-date total export sales, +12.6%. The rise is attributable not only to volume increases, but also to price hikes for some raw materials.

 

The boost has been stronger for some provinces than for others. For example, in energy product exports, Newfoundland and Labrador is +49.5% through the first half of this year (i.e., relative to the first half of last year); Saskatchewan is +56.3%; and Alberta, +61.1%. Those three provinces are the nation’s headliners in oil and gas production.

 

In ‘metals and minerals’ exports, Quebec is +25.7% year to date; Ontario is +8.3%; Saskatchewan, +13.4%; and

B.C. +13.1%. There is, however, a way in which Canada is vulnerable on the resources trade front.

 

Much of what happens in world commodity markets depends on a continuing strong growth performance by

China’s economy. Presently, there is no reason to mark down China’s ‘real’ (i.e., adjusted for inflation) GDP growth forecast of +6.5%.

 

But a huge build-up in Chinese debt is a cause for concern longer-term. Rapid increases in indebtedness have,

at various times, created vulnerabilities in other nations that have necessitated serious corrections.

 

Residential construction in Canada continues to cruise along at a rate of about 200,000 units (annualized) each

month. This is even after Ottawa and the provincial governments in B.C. and Ontario have taken steps to limit demand

— through tighter restrictions on mortgage lending and by making it more expensive for foreigners to purchase

single-family and condo properties.

 

There have been two intended goals. First, to put a halt to the kinds of double digit percentage-change price increases

that were making the cost of home ownership particularly for first-time buyers, untenable in Vancouver and Toronto.

And second, to dampen an increasingly speculative fever, given that interest rates are finally marching upwards again.

 

The Bank of Canada’s newly hawkish stance on interest rates is a double-edged sword. The fact the BOC has enough

confidence in the strength of the Canadian economy to lift yields is a good sign. But it’s worrisome that as interest

rates, and especially mortgage rates, climb again, meeting monthly financial commitments will become distressingly

more difficult for many homeowners.

 

Ontario’s housing starts year to date in 2017 are +3.0%, with Toronto at -2.0%.

 

In non-residential construction, there are office building and manufacturing projects that will proceed in a normal

cyclical manner, as vacancy rates continue to tighten and capacity utilization rates firm up further. With respect to the

latter, the low-valued Canadian dollar is providing a boost to production-line export sales.

 

Paramount, though, will be the push to upgrade and expand infrastructure. A just-established Infrastructure Bank is

being stoked with $35 billion in public funds in the expectation that this will entice the private sector to contribute

another $150 billion or so.

 

The danger is that the bank will be co-opted for inappropriate purposes (i.e., ‘pork barrel’ politics.) Construction

industry trade associations have got it right when they vociferously argue that infrastructure spending must go towards projects that will enhance Canadian productivity.

 

Governments should keep in mind that having such an objective will carry them to a righteous pay-off. Promoting

growth in Canada’s national output will ultimately yield higher tax returns.

 

 

 

 

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