Oh Canada! What is happening to your economy in 2015?

The fall in oil and commodity prices that began in the summer of 2014 is something which I have broadly welcomed. This is because there are many more consumers than producers of such goods so that there will be an economic benefit to the world’s economy overall. However countries which depend on resource production will find the economic going much tougher and there was a broad hint about this in today’s purchasing managers report for manufacturing in China. Not only did it show a second contraction in a row but there was this in the detail.

Average input costs fall at sharpest pace since March 2009


Whilst this offers a direct guide to a likely strong impact on the South China Territories otherwise know as Australia there is an implicit link to the resource producer that is Canada too. More fuel for the argument has come from the latest data from the commodity price index from the Reserve Bank of Australia released earlier today.

Over the past year, the index has fallen by 20.4 per cent in SDR (IMF measure) terms, largely driven by falls in the prices of bulk commodities. The index has fallen by 19.1 per cent in Australian dollar terms over the past year.


Whilst this index is specifically weighted for Australia the broad pattern of an initial credit crunch dip followed by a strong rally has now been followed by sustained falls. This pattern also applies to Canada.

What about economic output?

The factors above seemed to finally catch up with the official data record for Gross Domestic Product or GDP in the numbers released on Friday.

Real gross domestic product declined 0.2% in November, largely the result of declines in manufacturing, mining, and oil and gas extraction.


Actually I would have expected the impact of the falling commodity and oil prices to be greater but we do know that there would be larger impacts in both December and January to come. Also November was a particularly weak month for manufacturing in Canada.

Manufacturing output fell 1.9% in November, after rising 0.7% in September and 0.6% in October. Durable-goods manufacturing decreased 1.8% in November, as most industrial subgroups declined.


Some care is needed here as Canada produces monthly GDP estimates so it would be harsh and unfair to call a recession if the next one records a decline but there are obvious building issues on their way.

What about the labour market?

As followers of the comments section of this blog will be aware there has been quite a change recently and it is not reality which has changed by the official measurement of it. In the middle of last week a broadly positive picture was painted by Canada Statistics.

Compared with 12 months earlier, weekly earnings increased by 2.2%……On a year-over-year basis, non-farm payroll employment increased by 120,400 or 0.8%, with an upward trend from April through October of 2014.


However there was a slowdown in wage growth in November and this happened to employment.

Total non-farm payroll employment declined by 33,000 in November, after edging up (+9,100) in October.


So a situation many countries would love has seen a deterioration but then boom! From the Globe and Mail.

It turns out the economy created just 121,000 jobs last year, not the more hopeful initially reported tally of 186,000.


So actually there has been quite a downgrade about which the newspaper was scathing.

Imagine an engineer who underestimates by a third how much structural steel is required to support a 60-storey tower.


A different perspective was provided by this.

As Bank of Montreal chief economist Douglas Porter pointed out, the revision alone is more than three times larger than the 17,000-plus Target Corp. workers poised to lose their jobs across Canada.


Regular readers will be aware that I discuss from time to time the error margin of such numbers which applies elsewhere too.For example the two official surveys in the United States regularly give different answers. Canada has a problem but so does everyone else except not currently as publicly and of course it adds to the mistake made in July 2014.

As Andrew Baldwin has already pointed out there are alos issues with the numbers for the growing numbers of self-employed which of course is an issue across the developed world right now. Also I note his point about the election in Ontario where the incumbent government used the employment growth which has now been revised away. As the current UK coalition is already using the UK’s jobs record that provides plenty of food for thought for May does it not?

However we move on with a both a labour market and a statistical institution with weaker records than previously thought.

What about Canada’s housing market?

Apologists for the situation here have been able to point to an economy that has been strong and in particular a booming resources sector. Now the latter is not booming and the economy has had as a minimum a hiccup the numbers below take a different perspective.

IMF staff analysis suggests a national real house price overvaluation between 7–20 percent although with important regional differences.


If we go back to November of last year then a Deputy Governor of the Bank of Canada warned on house prices too.

In the post-crisis period, household debt levels and house prices have risen, owing, in part, to accommodative monetary conditions necessary to support the economic recovery.


In December the Financial Systems Review put it thus.

The most important risk is the inability of stretched households to service their debt should they face a sharp decline in their incomes or a sharp rise in interest rates, which could trigger a correction in house prices. The probability of this happening is low, but if it did, the effect on the economy would be severe.


The debt issue has been identified by the Financial Post.

The record-low rates have contributed to record household debt in Canada which was 162.6% of disposable income in the third quarter, according to Statistics Canada.


What about Canada’s banks?

According to the IMF everything is fine.

Canadian banks remain highly profitable, with favorable loan quality, low nonperforming loans, and improving capitalization. Stress tests suggest that banks are resilient to credit, liquidity, and contagion risks due to their strong capital position, stable funding sources, and low exposures to the energy sector, as well as extensive government-guaranteed mortgage insurance.


It is true that Canada’s banks have pretty much sailed through  the credit crunch era compared to the disasters seen elsewhere.. But there are many challenges ahead including the sort of ones which have collapsed banks and indeed banking sectors elsewhere.

Indeed the complacency highlighted above was brought into question on the 21 st of this month by the Bank of Canada.

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent.


If you consider that to central banks the banking sector is the “precious” then you might wonder about the likely reasons behind a surprise rate cut! To my mind this is reinforced by the fact that the banking and indeed household/housing sectors are missing from the statement.


There are a multitude of factors impacting on Canada right now and not all of them are negative. The falling Canadian dollar may improve the trade balance and the impact of lower oil prices on the world economy will set a more helpful international environment. But if the oil price continues to be around us $50 per barrel then Canada faces perhaps its most serious challenge of the credit crunch era. We now know that via the labour market revisions things were not as good as previously though and we also know that the Canadian household sector is heavily indebted. So any slow down poses dangers across a range of indicators which include the housing sector which of course involves the banks. Intriguingly even Barclays Bank appears to agree with me. From CBC News.

From our standpoint, the surprise reduction in the overnight rate by the Bank of Canada is a net negative for the banks,” the report said.


Accordingly there are scenarios where 2015 leads to a range of economic issues for Canada. Perhaps South Park was correct to ask this question.

Do you ever stop to think how important Canada is to the world?






9 thoughts on “Oh Canada! What is happening to your economy in 2015?

  1. Hello Shaun ,

    when the oil price recovers later this year I think Canada will be ok

    but then again if the market bucks the fundamentals ( like thats never happened ! ) and we have a protracted lower oil prices , even back to cheap , , circa $25 , then I think it will not just the Kanucks that will be in trouble !!


    • Hi Forbin

      A lot of it does come down to the oil price which we know will have affected Canada badly in December and January. Late Friday and today there has been something of a bounce meaning it is back above US $54 in Brent Crude terms, but after the drop a sharp bounce of the dead cat variety was always likely it is whether it lasts that is the issue!

      Should the oil price remain low then as I put in the article I worry about Canada’s banks as we know that banking systems whatever the regulators tell us invariably cannot cope with any real downturn.

  2. Wonderful column, Shaun. I wish you wrote for one of our Canadian mainstream newspapers.
    You are absolutely right to zero in on our housing market as a special worry. In its January Monetary Policy Report, published with its interest rate announcement, the BoC wrote: “In the near term, real GDP growth is expected to slow to below the growth rate of potential output, and the unemployment rate is expected to rise as investment in the energy sector rapidly contracts in response to lower oil prices and as housing market activity in energy-intensive regions slows.” The BoC is still singing from the same soft-landing-expected-for-the-housing-market hymn book, but it looks increasingly likely it will be a very bumpy landing, if not an outright crash, for housing markets in the Oil Patch cities.

    It is worth remembering that ALL housing prices used in the CPI All-items targeted by the BoC are based on the new housing price index, which excludes the more volatile prices of condominium apartments. This includes the components for real estate commissions and land transfer taxes, which are largely related to existing home prices. In addition, it is more stable in upturns and downturns than it should be, a problem StatCan itself recognizes but has never resolved.

    Therefore, the Teranet National Bank House Price Index (HPI), a repeat sales price index, is probably a more reliable indicator of housing prices. Where the NHPI shows a monthly increase in November, the last month published, the Teranet-NB HPI shows decreases in both November (-0.3%) and December (-0.2%). For Calgary, the leading Oil Patch city, there are drops of 0.2% in November and 1.1% in December. Unfortunately, the index doesn’t monitor other important Oil Patch cities, like Saskatoon (for which other measures already show price weakness) and St. John’s.

    The American economist Jim Rickards sees the BoC’s overnight rate drop as a salvo in a currency war with the US and Canada’s other trading partners, and he is probably right. Nevertheless, concern about a collapse in the housing market in several important Canadian centres also probably influenced the BoC’s decision. Unfortunately for our central bank, it is now a victim of its own folly. In the 2011 renewal of the inflation-control agreement, there wasn’t even the most modest reform of the inflation measures. Even a switch from the All-items CPI to the CPI for All-items ex mortgage interest, already published by StatCan, would have made their target inflation measure more sensitive to current housing prices. An analytical consumer price series for owner-occupied housing based on the net acquisitions approach was last updated to August 2000 (it stretches back to January 1982). The BoC has never insisted it be updated. Now if the housing market in the Oil Patch tanks it will have a big impact on employment and output but very little on the measured inflation rate, which the BoC targets. The actual inflation rate could be much below the measured inflation rate, but the BoC would be hamstrung. It couldn’t admit it without renouncing its own misguided views.

    • Andrew, we ain’t got much of an Oil Patch here in the UK but the Granite City (Aberdeen) is seeing soft property prices after near London escalations iin recent years. They got salary cuts in the offshore industry. I don’t think it is a grey swan yet but you never know with secondary effects.

    • Hi Andrew

      We could print this as a standard central banking reply to any question about a housing boom/bubble!

      “The BoC is still singing from the same soft-landing-expected-for-the-housing-market hymn book, ”

      Often the landing is as soft as the UK probe to Mars which was recently discovered after being lost for several years…

  3. Looking at the Economist’s “Big Mac Index”, Canada’s currency level seems to be roughly equal to fair value. Safe haven Switzerland is shown with a strongly overvalued currency. But oil rich Norway’s currency is very high/overvalued compared to oil exporting Venezuala, Saudi Arabia & Russia.

    Talking to friends recently back from Oslo, Norwegian PPP is poor despite high wages due to sky high costs of everything.

    • Hi ExpatInBG

      Isn’t the cost of living issue a Nordic wider than just Norway? Having now looked at the Economist Index I note that Denmark is paying the price of the Euro peg. Also I note Russia and Ukraine at the bottom,have the price nor adjusted let to the new reality?

      As to the Canadian position it makes a case for flexible exchange rates in that the Loonie (which always raises a smile in the UK but just to be clear is a Canadian bird) has fallen from the 1.07 to the US Dollar at the end of June 2014 to just under 1.26 now. So some relief for Canada especially as the inflationary impact will struggle right now.

      • I’ve little info on Swedish living costs other than the 4 quid beer I bought in 1992.

        The big mac index was meant to be a joke, useful only to Ronald McDonald but now our central bankers are looking more and more like fools, jesters and clowns. Unfortunately the joke is on taxpayers and Carney isn’t cheap ….

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