Armchair Canadian economics

April 24, 20196 Comments

“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.

Keith’s next BNN television appearance is on Wednesday May 1, 6:00pm.

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6 Comments

  • Hello Keith,

    This touches on something I have been thinking about for a while. There seems to be no mechanism in governance for spending less and removing influence in areas where free market forces do a better job of allocating resources, managing risks, and finding efficient solutions. When an event occurs or a goal is identified, the government seems to default to spending more money to “fix” the problem; whether that spending be direct (spending bills), indirect (tax incentives which reduce tax receipts), or by way of backing credit (US student loans). Grand promises work on the campaign trail and there will always be problems that can be identified; but never an endless supply of creditors to the spendy government. I guess it’s the function of the conservative members to argue on that front, but it’s no glamorous cause. What kind of framework would reduce government spending, while being able to compete against spendy ideals at home and abroad?

    Bob

    Reply
  • Everything say in your blog is true. Canada is poised to enter troubled times. Unfortunately the more fiscally responsible governments will be saddled with the colossal mess the previous government has left them with. Belt tightening will be required, and unpleasant. Individuals and previous governments who have artificially increased their standards of living through spending and accumulative debt will blame new governments when the hard times come – and the subsequent belt tightening that must be done.
    We need to teach young people basic economics. It should be considered mandatory that we learn to save for a rainy day. In fact, it should be mandatory to take a basic economics class before being allowed to vote! Either way, the rain always comes. I appreciate that you are making an effort to educate the public – and your prediction of rainy days ahead.

    Reply
  • Here is an idea, let’s look at the ROOT of the problem.
    Democracy is becoming too decentralized.
    Provinces fight between themselves.
    Federal fights with provinces.
    We need to simplify this entire mess.
    Solution: Eliminate provincial governments.
    The USA is in a similar situation.

    Now look at countries that don’t have this problem:
    China, biggest growth in last 50 years.
    Russia, almost broke apart, now smaller but in back in one piece and doing better.

    Reply
    • Agreed in some ways Robert–but the examples of two dictatorships is a bit disconcerting….

      Reply
  • Keith
    Always enjoy your analysis and comments, usually to the point.
    I believe the recession you mentioned as 2018 should be 2008.
    I am familiar with the saying ” Often wrong, but never in doubt” as practiced by the current Ottawa crowd.

    Reply

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