The Coming Economic Downturn In Canada

Authored by Deb Shaw via,

  • Canadian GDP growth has outperformed this year, helping the Canadian dollar
  • As GDP growth slows and the Bank of Canada turns neutral, catalysts turning negative
  • Crude oil and real estate look set for a downturn, with negative implications for the currency

Given its natural resource-based economy, Canada is a boom and bust kind of place. This year, the country has enjoyed a significant boom. Thanks to a government stimulus program, rising corporate capital expenditures and consumer spending, Canada’s GDP growth has been nothing short of spectacular in 2017. According to Statistics Canada, the latest reading for year-over-year GDP growth is a healthy 3.5% (as of August 2017). While this is stronger than all major developed countries, growth is decelerating from its most recent peak in May 2017 (when GDP growth was an astounding 4.7%). A visual overview of historical GDP growth is shown below for reference:

Turning a corner: Canadian growth comes back down to earth

11-17-2017 CAD GDP growth

Source: Statistics Canada

Following the crude oil bust in the second quarter of 2014, Canadian growth rates cratered. While the country avoided a technical recession, the economic outlook was poor until early 2016. After crude oil returned to a bull market in the first quarter of 2016, the fortunes of the country turned. Given limited growth in 2015, the economy had no problem delivering 2%+ year-over-year growth rates in 2016. As a substantial stimulus program ramped up government spending in 2017, growth rates have continued to accelerate this year.

Storm clouds on the horizon: crude oil and real estate

While Canada has delivered exceptional growth in the last two years, the future outlook is much more challenging. Beyond the issue of base effects (mathematically, year-over-year GDP growth will be much tougher next year), key sectors including the oil & gas industry and Canadian real estate look ripe for a downturn.

Crude bull market intact today, but at risk in 2018

As WTI crude strengthens beyond $55, crude oil is clearly in a bull market today. Looking at figures from the International Energy Agency, global demand growth continues to run ahead of supply growth. Thus the ongoing bull market is supported by fundamentals. Thanks to the impact of hurricanes and infrastructure bottlenecks in 2017, US shale hasn’t entirely fulfilled its role as the global ‘swing producer’ this year. The dynamics of supply growth versus demand growth are shown below:

Who invited American shale? US supply ruins the crude oil party

10-13-2017 crude oil supply demand

Source: International Energy Agency, forward OPEC supply estimates via US EIA

Unfortunately, the status quo looks set to change as US supply returns with a vengeance. According to estimates from the IEA, supply growth will outstrip demand growth in the first quarter of 2018. Digging deeper into supply estimates, US shale is once again to blame. Our view is that this changing dynamic will lead to a new bear market in crude oil. Looking back at recent history, crude prices formed a long-term top in the second quarter of 2014 once supply growth overtook demand. Similarly, crude prices bottomed in the first quarter of 2016 once supply growth fell below demand in early 2016. Given Canada's dependence on crude oil exports, a bear market for the commodity is likely to result in a weaker currency.

As China enters its latest real estate downturn, Canada not far behind

While Canadian real estate has enjoyed a great year, the future outlook is much tougher. Similar to its peers in Australia and New Zealand, Canadian real estate prices tend to lag real estate prices in China. This is both because Canada’s economy is deeply intertwined with China, and because the country is a big destination for overseas investment from China. While overseas investors make up a relatively small portion of buyers (around 5% according to government estimates), they serve an important role by acting as the marginal buyer for prime property. A comparison of new house prices in China versus Canada is shown below for reference:

Canadian real estate boom set to run out of steam

11-17-2017 China Canada real estate

Source: Statistics Canada, China National Bureau of Statistics

As Chinese new house prices accelerated significantly in early 2015, Canadian real estate prices followed in 2016. As the Chinese market is now decelerating, negative growth appears to be on the horizon. In March 2015, Chinese house price growth bottomed at -6.1%. While the Canadian bull market continues for now (September new house prices registered at 3.8%), a downturn is likely over the next 6-12 months. As real estate makes up 13% of Canadian GDP, a significant decline in the fortunes of the industry are likely to spill over to the broader economy.

Implications for the Canadian dollar

At the beginning of the year, the Canadian dollar enjoyed a wide number of bullish catalysts including accelerating GDP growth, rising rate hike expectations, a relatively strong crude oil market and speculator sentiment that was at a bearish extreme. These catalysts, and the Bank of Canada’s actions in particular, helped the currency strengthen until late September.

Today, almost every factor that drives the Canadian dollar is working against it. Future GDP growth rates are set to keep decelerating. Looking at the Bank of Canada, its outlook for future rate hikes is now “cautious”. This is a big change from its hawkish tilt earlier this year. While speculator sentiment is no longer at bullish extremes, waning interest in the Canadian dollar is weighing on the currency. The ongoing NAFTA negotiations are another source of potential political risk. Finally, an impending downturn for both crude oil and Canadian real estate further worsen the picture. Thus, our longer term outlook on the Canadian dollar is bearish.



Laowei Gweilo nmewn Sat, 11/18/2017 - 19:45 Permalink

first, canada is not booming. it has shit wage stagnation and a bottomed out natural resources sector. the GDP numbers are about as useful as China's. it's doing 'decent' despite shit natural resources and manufacturing.second, that chart shows a decline from about 3.75% to 2% if it mimics Chinadaaaaaaaaamn shits about to pop off ! only 2%?!third, national averages are useless. TO has more in common with the US than Vancouver. and VAN has more in common with BJ or HK than Chinese average, by far.I actually agree about a real estate correction too but this is a pretty retarded way to explain it. just like the Long Short guy too many Americans thinking Canada is in any way analogous to the need look at Hong Kong, retards. 

In reply to by nmewn

Zer0head Zer0head Sat, 11/18/2017 - 21:00 Permalink

and dumbass Canucks voted this clown into power as its citizens fucking freeze in their own houses. Venezuela by the Arctic circle with no electricity or in the strange Canuck colloquial "Hydro"… 

I live in Dufferin County and have been struggling to pay my hydro bill for the last four years. My bill averages $400 a month in the summer and $650 in the winter. I have a ten-year-old who is not allowed to play any video games or watch TV. We sit in the dark on most days or use candle light. In the winter we huddle by the fireplace with heavy clothes and blankets and barely switch on the furnace. On most days, it seems like I am living in a third world country. I have been disconnected twice in the past. I have written to my MP and Kathleen Wynne, and got no response from them. Carole L, Azilda, Ont.__We’re ready to be shut off over a $588 bill. We live north of Toronto in a small town. We haven’t been able to pay our bill in two months. Had the cut off letter last week. My wife pretended to make a payment to avoid disconnection and buy time until next Friday when she gets paid.We have five children, two remain at home. Didn’t put in the A/C this year for fear of using too much hydro. I’m on CPP disability as I’m in remission from cancer. In the winter we use our wood burning stove because we shut our breakers off as we have baseboard heaters. Next week we’ll pay our bill and buy maybe $50 worth of food to hopefully survive.Patricia P __ I live just outside the city of Peterborough Ont., and I am impacted greatly by the cost of hydro.My bills are OVER $600 a month, but I have seen bills in recent years over $1,000 a month. I have suffered disconnections in the past, the worst one being on Remembrance Day while I was at the Remembrance Day Service paying my respects (I am a Canadian Forces Veteran). Even with the banks closed, I managed to get them their money. They took two days to reconnect me. We are on electric heat, and our water pipes nearly froze because of sub-zero temperatures.Gisele G

In reply to by Zer0head

sushi Dead Canary Sat, 11/18/2017 - 20:25 Permalink

Trudeau impleemnted a govt giveaway. $2,000 to every household with kids. Parents get cash "for the kids."Dirty secret not being told - Canada is running major deficits and ramping up govt debt. That "free money" going to the parents "for the kids" is actually govt debt that the kids will end up having to pay off. With interest. Including thier high tuition costs. And high shelter costs. And low job growth. On the bright side the govt will be supplying the populace with pot!!Sure to help with global competitive position!!!

In reply to by Dead Canary

Abapom Laowei Gweilo Sun, 11/19/2017 - 10:05 Permalink

analyses is half my opinion it will be worse...however do not overestimate Liberal government ability to borrow to spend on unionsbeyond any mathematical logic because unions vote for who ever promises money.. ALSO NOTE: algorithm for calculating foreign ownership is not correct.I mean it is BUT:1. if you buy business in Canada for more than $480k you get permanent resident visa automatically. Instant. moment you step on tarmac...2. when you buy house 15 minutes later you are counted as Canadian not foreigner...3. you automatically get free health care for you and your family. ( under Liberal government - your whole village will get free healthcare too FFS)4. you can then engage in insurance fraud of any kind, as Ontario is Insurance Fraud Capital in Western Worlds and biggest in G7( Ontario is Province) so foreign ownership is much much much lager than government is calculating but they know this and don't want to stop MILKING Chinese $$$.only under international pressure recently some tax are introduced to calm prices.REMEMBER real-estate prices where going up Annually 32% while inflation was 2-3%. how is this even logical? WTF!???To this date i am personally puzzled as who the heck is buying Ontario GOV Bonds when $0.36 of every dollar from Tax is going into Payroll and Pension payments !!!!!!!!!!!! not in copper wires concrete re bars...Canada has population of 32 million. 3.5 million people work for government at cost of $420 million in salaries This country needs Trump. Maybe 4-5 Trumps... 

In reply to by Laowei Gweilo

Adullam karenm Sat, 11/18/2017 - 23:57 Permalink

To be honest, Canada is a very large and disparate country. There are economic 'hotspots' as well as areas that are in full-fledged depression. But on the whole, the country seems to be living in a drug-induced stupor. Almost no one that I talk to accepts the fact that the country is economically got one foot over the cliff and the other on a banana peel.  All they hear on the news is how housing is going up in some of the major cities.The adage, "It's not a recession until my neighbour loses his job and it's a depression when I do" seems to be the mindset of the Jane and John Doe.

In reply to by karenm

shankster karenm Sun, 11/19/2017 - 09:07 Permalink

Pretty much the same in the 'USA' the gubmit adjust the numbers to suit them and then feeds it to the media outlets for distribution to the stupefied, doped-out, drunken, distracted dazed and confused masses of sheeple..who in-turn gulp it down and then quietly wonder wonder why they are the only ones not 'making it'.

In reply to by karenm

JuliaS nmewn Sun, 11/19/2017 - 03:35 Permalink

Don't you find it funny that a country such as Canda - 2nd biggest in the world with surplus of every natural resource, including clean drinking water, with very small military spending, with not a worry in the world practically, can go bust economically.How is that possible? Simple answer - corruption. No country is immune from it. In fact, the bigger the riches, the fatter the parasites.

In reply to by nmewn

Ink Pusher taoJones Sun, 11/19/2017 - 09:51 Permalink

They are having the world's biggest circle jerk surrounding "legalization" , a perfect storm ,too many cooks scenario is currently being played out.If they'd contracted real experts instead of using the unqualified myopic clowns on staff, progress may have been realized. But alas; It's the same old network of lobbyists and cronies calling the shots to build their monopoly pre-legalization causing more delay and paving the way for many more bad decisions to be made.The Federal government seriously screwed up when they permitted the provincial and municipal governments and corporations to weigh in and make their own contradictory laws and by-laws instead of creating one law for the whole country and keeping marijuana strictly under Federal jurisdiction.These delays were welcomed by the corporate cronies who seek to monopolize the industry for profit after spitting on patients and recreational users since the late 1930's. Hypocrisy, Greed and Stupidity are the foundations of their thus far poorly executed plan. I am not encouraged.

In reply to by taoJones

FactDog Sat, 11/18/2017 - 19:37 Permalink

This is total BS.  Canada's natural resources create a solid baseline of value and we do not print money like they do in the US.  It will not be that we are stronger than the US, but rather Canada will be the slowest -- in the race to the bottom. I see the loonie at parody with the greenback by mid-2018.