Canada and the United States have historically walked similar economic paths. The coming years, though, may see them take quite different journeys.
Investors should keep this in mind when planning their portfolios. We often hear that Canadian stocks are far cheaper than U.S. ones. That is true if you focus only on price-to-earnings ratios. Canadian stocks trade for about 12 times their expected earnings in 2024 compared to 18 times for their U.S. counterparts.
However, simple comparisons like this ignore the different trajectories of the two economies.
Canada is grappling with massive household debt, a metastasizing housing crisis and stagnant living standards.
The U.S. seems in considerably better shape. Granted, its yawning federal deficit remains a worry; so too is its poisonous politics. Despite all that, however, the U.S. economy retains a robust capacity to grow its output per capita, which is the necessary prerequisite for raising any country’s standard of living.
The recent performance of the two North American economies shows a stark contrast. In the U.S., economic output, or gross domestic product (GDP), bounded ahead in the third quarter at a 4.9-per-cent annualized pace. In Canada, economic growth slid to zero.
Could slow-growth Canada eventually catch a lift from its more vigorous neighbour? Let’s hope so. First, though, we have to work through the legacy of a couple of decades of bad decisions.
Our biggest vulnerability is our collective addiction to real estate and therefore to debt. On average, Canadian households are carrying $1.81 in mortgages and other loans for every $1 of disposable income, according to Statistics Canada. This is down slightly from recent highs, but is considerably higher than the norm 20 years ago.
Debt payments now consume nearly 15 per cent of Canadians’ disposable income – pretty much the same level that prevailed in Canada immediately before the financial crisis of 2008.
Americans were also deep in debt back then. Since the financial crisis, though, they have become a remarkably frugal bunch.
U.S. households now have only $1.02 in household debt for every dollar of disposable income, according to the Organization for Economic Co-operation and Development. They spend less than 10 per cent of their disposable income on servicing their debts, the Federal Reserve reckons.
The glaring difference in household debt levels means that U.S. households are better positioned than their Canadian counterparts to deal with today’s surging interest rates. So long as interest rates remain high in both countries, the U.S. is likely to continue outperforming Canada.
Certainly, Federal Reserve chair Jerome Powell sounded optimistic this week about the state of the U.S. economy. He reiterated that the Fed, which dropped its recession forecast this summer, is still not seeing anything that looks like an impending downturn on the horizon.
The same cannot be said for Canada. Signs of weakness abound. For instance, real retail sales per person are declining, noted Eric Lascelles, chief economist for RBC Global Asset Management, in a report this week. He added that the Bank of Canada’s Business Outlook Survey continues to get worse with every reading and is now approaching the threshold it hit in past recessions.
“If not for booming population numbers, the [Canadian] economy would be shrinking at a meaningful clip,” the Conference Board of Canada wrote in a recent report.
To be sure, it’s possible that at least some of the current difference between the Canadian and U.S. economies is temporary. Perhaps the U.S. economy will slump in 2024 as higher interest rates bite and pandemic-era savings run out.
However, anyone who wants to dismiss the current growth gap between the two countries as nothing more than a passing blip should think again.
Consider GDP per capita – the amount of economic output for each person in each country. Only by increasing GDP per capita can a country sustainably improve its living standards.
Canada has not performed well on this score for years. While the U.S. has grown its GDP per capita by a cumulative 16 per cent over the past decade, Canada has managed only a 6 per cent increase.
One culprit for Canada’s lacklustre GDP per capita growth is our dismal rate of investment in capital stock – things such as machinery, factories and technology that can boost future productivity.
Canada’s productivity now ranks a mediocre 18th among OECD countries. Between 2000 and 2022, Canadian productivity diminished by 9 per cent, falling to roughly 72 per cent that of the U.S., according to Barry Cross, a business professor at Queen’s University in Kingston.
Turning this trend around is not a quick or easy job. Just for starters, governments have to encourage more investment in technology. They also have to unclog the obstacles that discourage building anything in Canada – from homes to pipelines to transit projects.
I hope Canada will eventually get it right. Until then, though, investors would be well advised to maintain a relatively high level of international diversification. Yes, Canadian stocks are cheap. Unfortunately, there are some good reasons for that cheapness.
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.
