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Diane Francis


6 Reasons Canada Won't Share America's Economic Growth in 2014

Posted: 12/27/2013 2:45 pm

Consensus is forming that 2014 will be the economic turning point for the United States and that is, traditionally, good news for Canada. But is it?

Most rosy is the forecast by UBS that U.S. GDP will grow by about 3 per cent in 2014 and in 2015 then beyond. The IMF has also just raised its U.S. forecast.

"There has been good action taken by Congress to eliminate the fear about the budget and to reduce the sequestration. We see the Fed having taken some very well-communicated action concerning the tapering of the program, and those are good signs -- in addition to which we see some good numbers: Growth is picking up and unemployment is going down," head of the IMF Christine Lagarde said this week. "So all of that gives us a much stronger outlook for 2014, which brings us to raising our forecast."

Interestingly, if the United States grows by 3 percent that will virtually match China's growth, in absolute dollars. (Lest we forget the math. A 3 percent rate in the U.S. is based on a nominal GDP of US$17-trillion and China's equally rosy forecast of 7.5 percent is based on a nominal GDP of less than US$8-trillion.)
The turning point has come due to the energy boom in the U.S., the housing recovery, the health of its manufacturing sector and productivity rates, banking stability, job growth, low consumer debts and an improved fiscal situation due to the spending cuts imposed by sequestration.

Canada, unfortunately, has some headwinds that, until addressed, will likely decouple Canada's growth from its neighbour's in the short and medium term.

Here they are, not necessarily in order of importance:

-- Canada lives beyond its means as an economy, with trade and export deficits, despite the benefits of high commodity prices in the past few years.

-- Canada's productivity lags U.S. rates considerably, representing a negative metric that makes export growth difficult. The reasons are varied and include the fact that the Canadian economy is balkanized into political spheres of influence, variant tax and labour laws, non-tariff barriers internally and disparate worker credentials because it lacks a national trade agency to insure the fair flow of workers, goods and services or an over-arching Inter-provincial Commerce Commission. There is no free trade within Canada.

-- Canada's dollar is headed to as low as 88 cents U.S. this year, according to some projections, which is a symptom of problems but also, ironically, somewhat helpful in exports if sustained but not helpful concerning the following issue.

-- Canada's federal and Western provinces are pitch-perfect when it comes to debt levels, spending and investment. Their Triple A or high AA credit ratings reflect that.

But Eastern Canada, on the other hand, is a problem, a clearly defined have-not part of the country with high unemployment rates, high underemployment rates and spendthrift provinces led by Ontario which has the biggest debt of any sub-national government globally. In 2003-4, debts were C$140-billion and in 2013-14 are expected to reach $260-billion and heading higher.

So this means that as the Canadian dollar falls, repayments to foreigners increase as does the need for the Bank of Canada to begin increasing interest rates. The only solution is to bite the bullet, something that vote-hungry politicians have failed to address in the past.

In light of that realization, Goldman Sachs and others are shorting the Canadian dollar.

-- Consumer debt is Canada is worrisomely high. The housing bubble in Ontario, condo craziness, has forced prices for all real estate upwards, and increased borrowing, with the result that Canadians now have switched places with the Americans as holders of the highest consumer debt. (Americans were forced to shed their borrowing after the 2008 meltdown but Canadians continued the tradition.)

(This debt overhang will slow consumer spending in Canada, but the newly lower debt levels south of the border are expected to enhance U.S. growth in the next few years.)

-- Canada's cornerstone exports are facing declines. Natural gas is being replaced by U.S. shale gas production. Crude oil, Canada's most valuable export, is expected to drop in price $20 a barrel due to increasing supplies: the U.S. shale oil boom, Canada's increasing production, a relaxation of the embargo against Iran if it fulfills its pledges on the nuclear portfolio and Mexico's invitation to foreign oil companies to help increase production for its moribund national oil giant.

The one bright spot would be approval, finally, of the Keystone Pipeline, with its 800,000 barrels a day of exports. Another would be the Northern Gateway proposal to the B.C. coast.

But both are political footballs for different reasons and may not happen for years, if ever.

The Iranian diplomatic deal, if successful, could enhance world peace but would unleash much oil onto the market. The embargo has limited exports from 2.5 million barrels per day to one million.

The other important export driver in Canada is Ontario's auto industry but this year the province was overtaken, in terms of production, by the state of Michigan for the first time in a decade. And Ward's Automotive forecasts a steady decline in Ontario production.

On a positive note, most of Canada's problems are soluble if electorates, and their public servants, agree to old-fashioned belt-tightening.

Most importantly, Canada has to stop signing free trade agreements with countries that don't offer reciprocity in terms of export or investment opportunities, such as China and/or the European Union, and forge a Canadian Free Trade Agreement among its provinces and territories. And the US-Canada bi-national issues should be fixed and talks about a development partnership in the North should become policy.

But those are long-term solutions that have eluded Ottawa for generations.

In the meantime, just curbing the excessive growth and overheads of the entire Canadian public sector, and creating a healthy, fair market at home for the Canadian private sector, are bottom-line essentials that any nation-state must enact in order to protect and grow.


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  • Persistent Weakness In The Global Economy

    Uncertainty about the future of the European Union, the housing market on that continent and the risk of slowdown in Asian economies like Japan and China continue to hang over the global economy. This could depress demand for Canadian exports, potentially causing more damage to the country’s fragile manufacturing sector and Canada’s overall gross domestic product.

  • Political Gridlock In The U.S.

    A recently-signed budget deal could be a sign the brinksmanship that caused economic fretting all over the world, including in Canada, is behind us. But given the shape of this U.S. Congress, the recent agreement is no guarantee of future co-operation. The shaky peace in Washington could become increasingly fragile in as campaigning ramps up for the upcoming mid-term elections.

  • U.S. Tapering May Not Go As Planned

    Federal Reserve Chairman Ben Bernanke, soon to be replaced by Janet Yellen, announced the U.S.’s central bank will soon start to pare down quantitative easing, its monthly bond-buying program that has helped to bolster equity markets and consumer confidence during a particularly tumultuous time. Bernanke feels the economy is in good enough shape to step away from that policy, but only time will tell if the exit is premature, and threatens the recovery.

  • Falling Consumer Confidence

    Consumer confidence closed the year on a sour note amid a third straight month of decline. The Conference Board of Canada’s index suggested Canadians were wary about their finances and job creation, and a majority said it was a bad time to make a major purchase. If the trend keeps up in the new year, it could be bad news for retail activity, and therefore the economy.

  • The Domestic Housing Market

    A risky condo market, overbuilding, ever-decreasing affordability and runaway real estate sales that continue to defy expectations seem like a recipe for a crash. So far the bears have been wrong, and home prices have continued to rise. But that means Canada is now at or near the top of indices of the most inflated housing markets in the world. And that means the risk of a housing bubble bursting is not yet behind us.

  • Commodity Price Slide

    Canadian oil is trading at a deep discount compared to oil from the U.S. and around the world; gold and other metals have seen their valuations fall over the past year and could continue to do so if demand remains tepid. That's a big risk for the commodity-driven Toronto Stock Exchange and our resource-reliant economy.

  • Consumer Debt

    Canadian household debt grew to a new record of 163.7 per cent of income, meaning for every dollar earned, Canadian families owe $1.64. That means we haven't been heeding warnings from top officials to reign in spending and pay down debts while interest rates are still low.

  • Sharp Increase In Interest Rates

    A rosier economic picture might be enough to convince Bank of Canada governor Stephen Poloz to raise the interest rate for the first time in four years. If and when that happens, it will increase Canadians’ debt burdens and make repayment pricier, which could leave some debtors underwater.

  • Decline In Job Quality

    Canada's economy managed to pump out jobs and push the unemployment rate below seven per cent in 2013, but the problem lies underneath those positive headlines. Many of the jobs created have been part-time and few have been going to young people in this slow-growing economy. Meanwhile, many labour critics are sounding the alarm about the increase of precarious work in the form of contract, temporary and part-time jobs. 2014 could become the year job security becomes a thing of the past.

  • Disinflation (Deflation?)

    Global inflation in 2014 is expected to be the lowest since World War II and Canada's latest consumer price index showed prices in November were at the low end (1.1 per cent) of the Bank of Canada's acceptable range of between one and three per cent. The IMF has warned that Canada should factor deflation into its monetary policy. The lack of inflation can negatively affect wage growth and the power of a dollar for those looking to pay back debt.


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