Canada and Australia have a lot in common. Both economies are commodity exporters. Both countries have experienced high rates of immigration. Both countries largely dodged the global recession that shocked the developed world. Both are said to have world-beating banking systems. And both nations have amongst the developed world’s most expensive housing, when measured and against incomes and rents.
With these factors in mind, it was interesting to read a Maclean’s article about how a perfect storm has quickly shifted Canada’s economy from booming to recession:
As if Canadians needed more reasons to be worried. The collapse in oil prices that began more than a year ago, and has resumed of late, snuffed out Alberta’s energy boom more quickly and deeply than anyone expected. This week, Bank of Canada governor Stephen Poloz trimmed the benchmark lending rate by a quarter point to 0.5 per cent, the second such cut in six months, and slashed the central bank’s growth outlook for the remainder of 2015. The bank effectively confirmed suspicions that the economy entered a recession by noting in a statement that “real GDP is now projected to have contracted modestly in the first half of the year.”
While Canadian consumers have so far helped offset the damage by their seemingly unending willingness to borrow and spend, the resulting debt that households have piled on now represents an economic risk in its own right—particularly if job and wage growth weaken. Moreover, much of that borrowed cash has been sunk into real estate, a relatively non-productive sector of the economy, resulting in home prices that are as much as 63 per cent overvalued, according to Deutsche Bank. No wonder some believe Canada is tiptoeing around the edge of the abyss. “You have a resource economy that’s been blown apart sitting on top of a housing bubble,” says Marc Cohodes, a well-known Wall Street short seller who’s betting against Canadian mortgage lenders. “That’s a toxic mix.”
Now, the debate is how long and deep Canada’s downturn could be…
In just a few short years, Canada went from being one of the developed world’s most resilient economies to among the most vulnerable. And, unfortunately for heavily indebted Canadians, there are plenty of storms gathering in faraway places that threaten to push us under…
“Canadian forecasters consistently underestimated the impact of the sharp decline of oil prices on the Canadian economy,” wrote Randall Bartlett, a senior economist at TD Economics, in a recent report…
In Fort McMurray, Alta., once hailed as the epicentre of Canada’s economic engine, evidence of the oil bust is everywhere. Restaurant tables sit empty, apartment vacancies are climbing and the local airport is no longer packed with workers flying in and out of the tiny community…
For Canada, the current economic predicament would have seemed unimaginable just a few years ago…
Last year Roach predicted much of what’s unfolded in Canada when he warned that resource-based economies counting on China’s never-ending growth were in for a rude awakening. “China’s been a great bet for 35 years, but they’ve telegraphed this,” Roach explains. “They’ve told the world, roughly 7½ years ago, the model they had was not sustainable and they needed to change it”…
A Canadian housing downturn would be as painful as the slump in oil prices—perhaps worse… If and when the unwinding of the Canadian housing market finally occurs, it will send shock waves throughout the entire economy…
Like that jobless, 21-year-old stock trader in Beijing with the wrecked sports car, Canada’s wild economic ride has come to a sudden, unexpected halt in 2015. Now we’re left picking up the pieces and wondering where it all went wrong.
Substitute oil for iron ore, and fast forward 12 months, and you could just as easily be reading a story about Australia, which has also pinned its future on the (now spluttering) Chinese economy, with little else to fall back on.
