Financial markets are not the economy and the economy is not financial markets. But it’s often said that they’re both afraid of the same things. In this case, the concern is that the economy is careening toward a recession.
“The alarm bells are telling us that something is going to break somewhere in the financial system,” said Karl Schamotta, chief market strategist at Corpay, a foreign exchange service in Toronto.
Stock markets have sold off over the past three months. Since the beginning of July, the TSX wiped out all of the gains it made in the first half of the year.
U.S. stock indexes, such as the S&P 500 and the Dow Jones Industrial Average, have remained in positive territory, but not by much.
Those markets reflect a doomy prognosis that isn’t necessarily backed up by the economic data.
GDP and jobs numbers have shown a surprising resilience. The most recent figures indicate that the economy was flat in July, while a preliminary estimate shows it expanded again in August.
Canadian employers added 64,000 jobs in September.
That’s a far cry from the forecast of a recession through the third quarter of this year.
But Schamotta says that surprising resilience doesn’t negate the fact that Canadian households and businesses are in the midst of the most aggressive cycle of interest rate hikes this country has ever seen.
“We know historically when borrowing costs have risen this much that that stresses some part of the financial system — and as Warren Buffett likes to put it, when the tide goes out, suddenly we see who’s swimming naked,” he told CBC News.
Why the bond market matters
Stock markets are a notoriously volatile, fickle way of guessing where the economy is headed. The bond market is much bigger and far less whimsical.
And this week the bond market started flashing red.
Stock markets, where investors buy ownership slices of companies, get all of the attention, but the bond market — where companies and governments go to borrow billions of dollars each and every day — is a much more fascinating gauge for smart prognosticators like Schamotta.
Investors have been selling older bonds in exchange for newer ones that pay more. That bond sell-off has driven down the price of those bonds, but the yield — the percentage return that you’d get from holding them — has moved sharply higher.
On Friday, the yields on 10-year Treasury bills in the United States surged more than 15 basis points to 4.89 per cent. The five year Canadian government bond saw its yield jump 20 basis points to 4.42 per cent.
David Rosenberg, founder and president of Toronto-based Rosenberg Research, says U.S. Treasuries with maturities of 10 years or more have plunged 46 per cent in value since 2020 — all while disposable incomes (when adjusted for inflation) have fallen into negative territory.
Interest rates pushed his mortgage from 25 to 47 years
About one in five variable rate mortgage holders at three major banks are now in ‘negative amortization’ — where the time it takes to pay off the home loan is getting longer. It’s causing concern with regulators who plan to reign in the type of loan that allows it. One man saw his repayment period go from 25 to 47 years.
“These are crazy times, my friends,” Rosenberg wrote in a note to clients. “Real disposable incomes are down three months in a row.” And they’re on pace to fall by 1.7 per cent this year.
“The only reason spending has yet to follow suit is because of prior fiscal stimulus which has ended, and the boom in credit card usage.”
The bond market matters in all of this because it sets the price of money. And as everyone knows, Canadians took on a ton of debt over the past decade.
Schamotta says if you combine household, corporate and government debt in Canada, it is now more than four times the size of our entire economy.
“That’s far beyond anything we had reached before,” he said. “But it’s also among the highest debt loads in the world. We are not the prudent Canadians that the world thinks we are.”
The problem, of course, is that much of that debt was taken on at record-low interest levels.
Economy sending ‘mixed signals’
Spiking bond yields means investors are starting to think that high interest rates are going to stick around a lot longer than was previously thought, and they’re demanding to be paid more for the risk of lending out their money.
Still, some economists say it’s important to differentiate between financial markets and actual economic data.
Economic data has come in stronger than expected, but investors don’t seem to share in the optimism that the economy can avoid a recession. Canadian households and businesses are in the midst of the most aggressive cycle of interest rate hikes this country has ever seen. (Jasper Juinen/Bloomberg)
“It looks like the economy still has quite a lot of steam to get us through this period without falling off a cliff and getting into a recession,” said Tu Nguyen, an economist in Toronto with the accounting and consultancy firm RSM Canada.
She is now forecasting that the Canadian economy will stick a sort of “soft landing.”
A soft landing is a scenario in which gross domestic product and job growth slow enough to tame inflation without forcing the economy to slip into a recession. It would be a remarkable needle to thread after years of the COVID-19 economic catastrophe, soaring inflation and rising interest rates.
Nguyen admits that the economy has been rife with contradictions.
Tu Nguyen, an economist in Toronto with the accounting and consultancy firm RSM Canada, is forecasting that the Canadian economy will stick a sort of ‘soft landing’ in which a recession is avoided. (Alison Northcott/CBC)
“It is a little confusing because it seems like we’re seeing mixed signals, and I think we’ll continue to see that,” she told CBC News.
But she maintains that the “real economy” (GDP, jobs and inflation numbers) are increasingly painting a healthier picture than expected, and she says that’s a better reflection of what’s going on in the economy than markets betting they know what’s going to happen next.
But if the economy has had one characteristic over these past years, it’s been the ability to surprise everyone.
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.
