02/10/2012 01:38 EST | Updated 04/11/2012 05:12 EDT

Pffft: It's Not Like We Wanted to Be #1 Anyway


With the release of the latest growth projections from the Bank of Canada and the International Monetary Fund (IMF), it appears that Canada's two-year run at the top of the G7 group of countries could be coming to an end. Both the Bank of Canada and the IMF have lowered this year's growth predictions, paving the way for -- get this -- America to take over the top spot.

America? Seriously?

Certainly, the U.S. economy still faces potential hazards, but the past few months have provided reason for renewed optimism. The Canadian outlook, on the other hand, has softened during the same time period.

For example, in January, Canada's unemployment rose to a nine-month high of 7.6 per cent after falling steadily for the first half of 2011. For the month, a paltry 2,300 new jobs were created.

South of the border, the story is quite the opposite as 243,000 workers were added to the ranks of the employed in January causing the unemployment rate to fall to a two-year low of 8.3 per cent. This is more than 100 times the number of jobs created in Canada.

Of course, the U.S. population is considerably larger than Canada's, but it is not 100 times larger. More like eight times. Advantage U.S.

Canada's decline in employment mirrors a similar decline in growth prompting the IMF to reduce its growth outlook for Canada. The IMF now believes the Canadian economy will expand by 1.7 per cent rather than 1.9 per cent as predicted last fall.

Compare this to the IMF's projection for the U.S. economy. While the IMF was lowering growth projections for Canada and most European countries, it left the U.S. outlook unchanged. In the current environment, finding it unnecessary to lower its earlier prediction is actually a remarkable vote of confidence.

Again, advantage U.S.

The Bank of Canada cited its concern that Canadian households were taking on far too much debt as one of the reasons it was lowering its outlook. The latest debt to income ratio calculation indicates the average Canadian household debt to be in excess of 150 percent of annual income.

Mortgage debt in particular has increased thanks to mortgage lending rates remaining very low. This has made it possible for buyers to qualify for larger loans than they would have otherwise been capable if rates were higher.

For now, those holding high-ratio mortgages are likely encouraged by the lowered growth outlook as it reduces the probability of a Bank of Canada rate hike in the short term.

Nevertheless, it is folly for borrowers to rely on interest rates remaining at current levels for the full amortization period for multi-year loans. At some point, mortgages rates and subsequent payments will rise and when they do, this could trigger a rash of defaults as we saw in the U.S. prior to the 2009 recession.

As concerning as household debt may be for the Governor, it is the Eurozone debt crisis that is the number one worry at this time. In the Bank's quarterly outlook released January 18th, Carney warned that the drag on the Canadian economy stemming from the European crisis could result in Canada losing as much as 0.6 per cent of its annual output, or roughly $10 billion.

The IMF agrees with the Bank of Canada's bleak assessment for the Eurozone. While some European countries are expected to see slight growth for the year, overall, for the 17 members comprising the Eurozone, it is anticipated that the economy will decline by 0.5 per cent compared to 2011.

The Bank of Canada statement did have some positive news, however: by 2013, the economy is expected to rebound with growth between 2.8 and 3.0 per cent. This is actually above the Bank's inflation rate target and could well be the event that starts sending interest rates higher.

So, while Canada may indeed be dislodged from atop the G7 leader board before the end of the year, the overall outlook remains reasonably optimistic. While other jurisdictions in Europe are sliding towards recession, Canada can still expect positive growth over the next two years.