Governor of the Bank of Canada, Tiff Macklem, speaking before the Canadian Club Toronto at the Royal York Hotel in Toronto on Dec. 15.Carlos Osorio/The Globe and Mail
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The first step in solving a problem is acknowledging its existence. Yet, that seems lost on the Bank of Canada (BoC) and the federal government given the looming economic challenges facing this country. In turn, Canadian investors should re-examine their well-documented home bias and mitigate the coming risks by allocating a significant portion of their assets outside Canada.
Since the global financial crisis, Canada’s economy has been heavily reliant on extreme levels of personal and corporate debt. The personal debt to disposable income ratio stands at a staggering 187 per cent – the highest among the G7 nations – putting individuals under a hefty financial burden.
Corporations are not immune, often resorting to debt issuance to maintain high dividends. Bay Street, long a facilitator of this precarious economic path, needs to acknowledge its role in this narrative.
That party is now coming to an end. The BoC’s aggressive interest-rate hiking campaign, which has taken the overnight rate to 5 per cent from 0.25 per cent, looks set to steer Canada’s economy toward financial hardship.
Homeowners and corporations face the daunting reality of refinancing at these much higher interest rates. Specifically, the wave of mortgages due for refinancing at current interest rates could affect economic growth significantly for the rest of the decade and render the BoC impotent.
There’s emerging evidence Canadian households are already feeling the increased financial strain. The debt service ratio rose to 15.22 per cent in the third quarter, marking the highest point on record dating to 1990, according to Statistics Canada data.
In fact, total mortgage interest payments have risen by 90 per cent since Q1 2022, while the amount of mortgage principal paid during this time has declined by 16.8 per cent. Canadians are now allocating 9.26 per cent of their disposable income to interest payments, the highest since 1995. Upcoming mortgage renewals pose a potential payment shock for homeowners, exacerbating the situation further.
Canada needs a substantial industrial policy
The BoC has misdiagnosed the economic conditions and potential outcomes. The main concern should not be inflation but secular stagnation and deflation.
The Canadian economy is alarmingly reliant on credit and real estate. Furthermore, Canada’s productivity growth is disappointingly declining 2.2 per cent year-over-year, while the U.S.’s is at an encouraging 5.3 per cent. Taking these factors into account, the growth of the Canadian economy may be hindered for years to come.
As a result, Canada needs a substantial industrial policy to aid its transition into the digital age. This country must have the necessary tools for the new world of artificial intelligence and blockchain with an industrial policy similar to U.S. President Joe Biden’s CHIPS and Science Act or the U.S.-Japan Digital Trade Agreement.
Canada’s demographic quagmire
Canada also finds itself in a demographic quagmire as international migration accounted for 98 per cent of the population growth in 2022-23. The surge in population, reaching 40.5 million people as of Oct. 1, marked the highest growth rate since 1957 and surpassed any previous full-year period since Confederation in 1867.
While new participants in the economy are expected to drive economic expansion in the medium term, the short-term strain on social services, housing markets, and productivity growth presents additional challenges, exemplifying the complexities of fiscal and monetary policies working at cross purposes.
The intensified pressure caused by immigration on housing and rental markets has exacerbated existing shortages. Paradoxically, the BoC’s high interest rates have suppressed housing supply, contributing to inflationary pressures.
Those too quick to respond may say these trends will force the central bank to maintain interest rates at a high level or raise them further, but a more nuanced approach, taking into account that interest rates are the price of credit and can constrain supply, would suggest that this should force the BoC to cut interest rates.
Considering a reduction in interest rates to stimulate housing supply may be a crucial nuance for the BoC to integrate into its monetary policy decisions. This demographic quagmire is front of mind for investors when evaluating Canada in 2024.
Policymakers’ denial is being noticed globally
Current economic data suggest that Canada is heading toward a recession. Yet, the BoC, Ottawa, Bay Street, and Canadian investors are in denial as they have yet to fully acknowledge Canada’s distinct economic landscape compared to the U.S. Given the prevalent extreme home bias in investment portfolios, investors must consider diversifying away from overemphasizing Canadian assets.
International investors are already reconsidering their Canadian investments. Canadian policymakers’ denial is being noticed in global capital markets. The sooner the BoC and Ottawa adopt a realistic, fact-based perspective of Canada’s financial situation, the better for everyone involved.
If the BoC does, indeed, come to this realization, interest rates could be cut more aggressively than many believe. By the end of 2025, the BoC’s overnight rate could drop below 2.5 per cent. However, before any recovery can start, a bottom must be hit. Therefore, it would be wise for Canadian investors to brace for impact and prepare for the challenging times ahead.
James Thorne is chief market strategist at Wellington-Altus Private Wealth Inc. in Toronto.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
