“As long as I have logic and rationale I may not always be right, but I am never wrong.”
I’m not sure who made that quote, but it’s the way I look at Canadian economic policy right now. And that policy plays into why the loonie continues to fall, and may continue to do so for several more pennies (vs. the USD). I’m a Technical Analyst, and not an economist. I may not be right when I try to decipher the economy with the data I present below – but I know that I am not wrong, either. If that makes sense….
A very short look at some economic factors concerning debt in Canada over the past 3 years.
BTW–a forewaring that my political distates for spend n’ tax governments is fairly clear in this blog. If you think the current federal government is doing a great job, you might want to bypass the rest of today’s blog. I don’t plan on debating politics here. As I said, I may not be right, but I know I’m not wrong–so I wont get into individual reader political biases here.
To simplify things – There are two main ways for government to stimulate an economy when in a recession. One is through fiscal stimulation ((i.e. investing in infrastructure and business). The other is monetary stimulation (i.e. lowering interest rates, quant easing). In order to combat the devastation of the 2008 recession, both Canada a the US invoked monetary stimulation by reducing interest rates and, in the US’s case, by additional quantitative easing (thus making money more available and cheaper to borrow for business and households). Since the recession ended, both countries have tried to gently raise rates and reduce their monetary stimulus – with limitations. While the US has been able to stimulate their economy steadily, something happened in Canada that has caused us to take a dramatic turn in negative growth over the past few years.
The US GDP growth chart, courtesy of tradingeconomics.com shows us the steady growth in the US economy.
The Canadian GDP chart, also courtesy of trading economics.com, shows us that something started going wrong in 2015.
To be sure, the peak in oil in 2014, followed by its decline in 2015 onwards affected our economy. An unfriendly broad federal government policy towards business taxation and investment, along with pipeline politics, carbon taxation and discouraging development within the energy industry didn’t help in this already depressed environment for our oil.
Adding to the decline in our GDP relative to the USA has been our government and household debt. Monetary stimulation (lower interest rates) made purchasing real estate and goods attractive. Thus, our household debt/service ratio has risen to 170% – chart below is only to 2016 and it has grown worse since – amongst the highest in the developed world. Meanwhile, US household debt has been steadily contracting. Canadians are becoming tapped out for spending –something that doesn’t help with future investments, spending or development. Moreover, we are now more vulnerable to a change upwards in interest rates.
More importantly, the federal government elected in 2015 has been on a spending spree. Much of this spending is highly debatable as “useful spending”, at least from an economic point of view. One theory within Keynesian economic policy is to invest in GDP-stimulating projects during recession – ie, fiscal policy. Any investment that is made should be quantified as accretive to GDP growth.
Generally it is ill advised to invoke a spending policy when a country is well into the growth part of the economic cycle. The big issue is, what is left to spend when we actually run into a recession? The Governor of the Bank of Canada is not hiding from the downside to current federal government spending, let alone the household debt situation:
“If fiscal policy takes the lead in stimulating the economy, this can result in a buildup of government debt. If monetary policy takes the lead, this brings about a buildup in household debt. In both cases, stimulus leads to a buildup of debt over time, whether public or private. And excessive debt levels create a vulnerability, making the economy less resilient to future shocks.” Stephen Poloz, GOC, May 2018.
All this being said, it is certainly encouraging for those of us who are interested in the Canadian dollar, the Canadian economy, and the Canadian stock markets – to see a sign of fiscally minded governments replace “spendy” governments in recent Provincial elections. Ontario, Alberta, New Brunswick and PEI are hopefully the beginning of a new wave of fiscal prudence. The challenge may be in reversing the damage done. The current situation at the federal level (influenced by the Provincial level) is: high debt at both government and household levels, with falling gdp. This, the polar opposite of our US cousins – per the charts above. The Canadian dollar chart, below, looks quite entrenched in a downtrend. It is quite probable that we will see a continued slide on the loonie back to the old lows of $0.70 – $0.72. My conclusion – expect to see more downside on the loonie and Canadian GDP before the damage is reversed. I’d expect it to become even more challenging for the debt situation going forward if the current trend into more fiscally prudent governments is not realized at the federal election this fall.
As an aside–after I finished writing this blog–the BOC reported yesterday that it is seeing slower than anticipated growth and thus will keep rates low. Imagine that.
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