Concerns in the manufacturing and housing sectors forecast long-term problems for the suddenly surging Canadian economy
OTTAWA, Sept. 14, 2017 – The sudden upturn in Canada’s economic fortunes is masking major problems that will drag down growth in the future, writes Philip Cross in his latest quarterly economic update for the Macdonald-Laurier Institute.
Canada’s economic growth rate in the last quarter has surpassed the expectations of many observers, leading to some to go so far as to say we are in the midst of an “already-sizzling economy.”
“Such hyperbole is both inaccurate and unhelpful,” writes Cross.
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Manufacturing and housing sectors slowdowns are particularly cause for concern.
In terms of real GDP, Canada’s economy expanded by 1.1 percent in the second quarter, a modest improvement over the 0.9 percent increase in the first quarter. Growth was also primarily driven by two factors: autos and energy.
However MLI’s leading indicator raises doubts on the sustainability of such growth. In fact, the index has more recently slowed to 0.2 percent growth or less in the last three months, especially in the manufacturing and housing sectors, which points to the serious challenges on the horizon.
The Bank of Canada began to raise interest rates for the first time in seven years. Low interest rates were intended to encourage an upturn in exports and business investment, which would lay the groundwork for more sustainable growth. Lower interest rates did help to facilitate household and government debt. Yet its beneficial impact on either exports or business investment remains elusive.
Most of the recent increase in exports largely originated in energy products (up $10.3 billion) and autos (up $4.8 billion). The former can be attributed to a tentative recovery in the oil and natural gas sector, the latter driven by inventory-building in the US before long-scheduled production cut. Without an acceleration in US economic growth, further increases are not sustainable.
Meanwhile, business investment rose 1.7 percent in the second quarter, following a 3.3 percent recovery in the first. Oil and gas spending led the turnaround, rising 15 percent from a year earlier. Yet the durability of this recovery can be questioned. Investments in the oilsands are winding down, with several major projects have or are nearing completion and no prospect of new investments for the foreseeable future. Much of the gain apparent gain in the first quarter to $165.1 billion simply represented a return to more normal levels of investment after the impact of the Hebron oil platform came and passed in 2016.
Further slowing the economy has been the unwinding of the three-year boom in Canada’s housing market, which began in the second quarter after the average price of a house reached nearly $1 million in both Vancouver and Toronto. Both the BC and Ontario governments slapped taxes on home purchases by foreign buyers, which led to a one-time drop in demand. The Bank of Canada’s move to raise interest rates will start to curb demand on an ongoing basis, including the negative impact of a higher dollar on foreign buyers.
Philip Cross is a Munk Senior Fellow with the Macdonald-Laurier Institute. He previously served as the Chief Economic Analyst for Statistics Canada, part of a 36-year career with the agency.
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