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.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
