What happened to Canada's economic miracle? - Macleans.ca

What happened to Canada’s economic miracle?

Stalled growth, rising debt — Canada’s stuck


Our latest cover story is actually two stories, comparing the state of the Canadian and American economies. View the companion piece to this story, here.

To outsiders looking in, Canada must seem like a potent place. In the midst of a global recession, our banks were profitable, home prices soared and lost jobs were quickly replaced—all feats Ottawa was fond of boasting about. “We have the soundest financial system in the world and that’s a strong point that we can share with others,” Finance Minister Jim Flaherty told reporters in 2008. A few years later, at the World Economic Forum in Davos, Prime Minister Stephen Harper promised to set the stage for a generation of economic growth with changes to immigration and a focus on selling oil and gas to Asia—part of a grand vision to make Canada an “emerging energy superpower.” The country’s new-found reputation for punching above its weight may have also played a role in the U.K.’s decision to hire Bank of Canada governor Mark Carney to run the Bank of England, the first time a foreigner has been sought for the job.

Carney doesn’t start his new gig until July 1. But already the holes in Canada’s narrative of economic exceptionalism are big enough to drive an oil sands dump truck through. Our banks, though still sound, have been downgraded by rating agencies because of their exposure to a potential Canadian housing bubble and high levels of consumer debt. Economists are worried that a pullback in government spending won’t be offset quickly enough by a ramp up in exports. And Alberta’s vaunted oil and gas sector is suddenly in trouble as a glut of new U.S. crude threatens prices and future investment. The stiff headwinds are reflected in GDP forecasts now expected to come in well under the previously anticipated (and already dismal) two per cent growth for 2013.

Canadians previously took pride in the fact that our small, resource-based economy was doing far better than that of our bigger neighbours to the south—Harper reminded CNBC viewers as recently as 2011 that Canada was still “outperforming the average, or the pack, in the industrial world”—but in the space of just few months the tables have seemingly turned. What happened?

Ben Rabidoux, an analyst at M. Hanson Advisers, argues Canada’s economic miracle was more of a mirage all along. “While there’s an element of truth about our banks being more prudent and such, the reason we escaped the recession with very little collateral damage is because we had the capacity to reinvigorate consumer spending by ramping up credit growth,” he says, referring to Ottawa’s decision to buy $69 billion worth of mortgages, beginning in 2008, from banks so they would continue lending. That, in turn, juiced home sales and kept shopping malls buzzing. “We didn’t grow our way out of the recession organically. We just papered over some of the weaknesses in our economy.”

It also added some new risks: a real estate market that appears in danger of collapse and potentially crushing levels of household debt. Now that consumers are tapped out, the best-case scenario is for the global economy to pick up steam just as ours begins to sputter, allowing exporters to take over from home buyers as Canada’s growth engine. But it’s a tall order, given the debt problems in Europe and slowing growth in China, which has raised fears of a global commodities slump. Even the rebound under way in the all-important U.S. economy could be a double-edged sword for Canada. “If interest rates rise because of a U.S. recovery, exports will pick up, but so will [the cost of carrying] consumer debt,” says Rabidoux. “The economy is just not as strong as people think it is.”

A recent report by the Royal Bank of Canada argued that Canada’s economy “cracked” in the second half of 2012. After boasting the strongest performance in the G-7 during the post-recession period, RBC blamed the abysmal 0.6 per cent growth in fourth-quarter GDP on slumping mining, oil and gas production, as well as a slowdown in construction and manufacturing. RBC has since trimmed its GDP growth outlook for 2013 by nearly half a percentage point to 1.8 per cent. Others have gone as low as 1.5 per cent. That’s about half the rate the U.S. economy is expected to grow this year. Moreover, Canada is expected to lag behind the U.S. for the foreseeable future, according to a recent forecast from the Organisation for Economic Co-operation and Development.

The stock market, a leading indicator, continues to lag those of other countries. In fact, the S&P/TSX was one of the worst-performing major indices in the world last year. Investors, the old adage goes, hate uncertainty. And Canada seems to offer nothing but.

For the 70 per cent of Canadians who are homeowners, the biggest worry so far has been the dramatic cooling of the housing market. In Vancouver, home sales were down nearly 30 per cent in February compared to the same month a year earlier, while prices have dropped 5.6 per cent since their peak, according to the local real estate board. In Toronto, where concerns are mounting about 144-odd condo towers still under construction, sales were down nearly 15 per cent in February and 12 per cent during the first two weeks of March. Montreal, too, saw a steep decline in housing activity in February, with overall sales down nearly one-third.

Some have warned about the possibility of an economy-killing housing crash, with prices dropping as much as 25 per cent. But most economists have settled on a marginally more palatable outcome: an extended period of little or no growth. A recent report by the Toronto-Dominion Bank forecast a brief correction, followed by a rebound and then price gains of just two per cent per year until 2023—a flat performance once inflation is factored into the equation. But that would still act as a drag on the Canadian economy considering that housing and related industries account for as much as 27 per cent of Canada’s GDP, which is more than the U.S. before the crash. An equally big concern is Canada’s household debt-to-income ratio, which now stands at a record 165 per cent—again, higher than in pre-crash America. Ottawa’s recent budget calls “exposure of Canadian households to elevated levels of debt” the “main risk” to its domestic forecast.

So where will future growth come from? “The baton was always thought to be handed off to exports and investment,” says Craig Wright, RBC’s chief economist. “But in the second half of last year the baton—I won’t say it was dropped—was fumbled so that exchange just hasn’t happened yet.”

A recovering U.S. economy promises to provide a lift for manufacturers and exporters, which could help offset rising interest rates by adding jobs. But risks remain. Canada’s huge resource sector, which accounts for nearly one-fifth of GDP, is increasingly vulnerable to events on the other side of the world. The Harper government’s first budget in 2006 touted higher commodity prices, driven by emerging economies, as a major factor in “robust corporate profit growth.” But now such bullish views are being called into question as China’s GDP growth slows from around 10 per cent annually to 7.5 per cent. In his annual newsletter to investors, Prem Watsa, the CEO of Fairfax Financial and Canada’s answer to Warren Buffett, suggested the top of the commodity cycle may have been reached when miner Rio Tinto bought Montreal-based aluminum giant Alcan for $38 billion back in 2007. Six years later, the company has written off nearly $20 billion amid cost increases and investor uncertainty. “If commodity prices come down after their parabolic increase, Canada will not be spared,” Watsa warned. Similarly, François Dupuis, the chief economist at Desjardins, wrote in a recent report that “the loonie’s drop to US$0.97 and a stock market that is underperforming the U.S. markets are both reminders that the rush for our commodities has waned.”

One only needs to look to Alberta to see what a more serious commodity slump might look like. Though global oil prices remain high, at around $108 a barrel, the province’s oil producers are currently receiving far less because a lack of pipeline capacity and a glut of U.S. oil from sources like the Bakken shale deposit have driven down local prices. Oil-rich Alberta now faces an estimated $6-billion shortfall in oil revenues this year.

More worrying, says RBC’s Wright, is rapidly deteriorating sentiment among Canadian businesses. A recent Statistics Canada survey revealed the slowest non-recession pace of growth in private and public sector investment intentions since 1995. “In an environment where corporate balance sheets are in pretty good shape, you would likely expect a bit more investment,” Wright says.

Yet even if the all-stars line up for Canada—the global economy roars back to life just as ours stumbles—don’t expect to hear more stories about our impressive performance. Unlike the U.S., Canada’s economy has very little room to grow due to our small, aging population and less dynamic workforce. Already the Conference Board of Canada and several economists have identified a looming skills shortage as a major threat to the country’s long-term outlook. Meanwhile, Canada continues to lag behind the U.S. and others when it comes to innovation and productivity, which are key to boosting competitiveness and raising per capita incomes. “Our speed limit is going to be constrained,” says Wright. “I think that’s why policy-makers, having dealt with the financial crisis, are back focused on competitiveness and prosperity.”

Canada did admirably while the rest of the world struggled back in 2009. But four years later the best it can hope for is a merely mediocre performance, even as the good times return elsewhere. And the spectre of another recession still haunts us. None of which is anything to brag about.


What happened to Canada’s economic miracle?

  1. It seems to me that your article is too late,since you do not close the barn door when the animals are still out.The good old u.s.a. is printing its way to prosperity,so we will see the results from that financial fiasco in the future,as the federal reserve board is buying bad mortgages from the american banks to get them back into fiscal shape,at the expense of the middle class taxpayers.The stock markets are booming there,way overpriced,but eventually the correction will come,more likely crash,so the boom to bust will occur one more time.

    • In the land of the midnight sun the petro dollar is king.

  2. How many could predict this to happen,probably a lot including myself.The governments no matter what level continue to misinform the population that things are OK and just look around the bend in the next couple of years and it will be back to normal.My question is what is normal a low income private sector living on minimum wages that amount to less than 20 hours a week and paying UIC even though there is not a chance in the world they can collect.

    Our politicians that have the look of George Orwell’s characters from animal farm continue to be the problem with spending and their own enormous incomes.

    Don’t look for changes because Justin Trudeau when elected will follow the party line.

    The Canada that I knew is gone.

  3. Canada is going steadily and conservatively,so it is probably better for the long run,instead of the federal reserve method of playing boom and bust for the u.s.

  4. The Bank of Canada isn’t “printing” trillions of dollars, euros, and yen like the ECB, the Fed, and the BOJ.

    The Bank of Canada isn’t stealing money out of people’s bank accounts like the ECB is doing in Cyprus, and which the Dutch finance minister said would be a template for the rest of Europe. The Bank of Canada is also not using extreme financial repression of zero interest rates like the Fed and the BOJ to bail out the banksters by dribbling wealth away from savers and pension funds.

    The government of Canada is not running extreme deficits like the governments of Europe, the United States, and Japan.

    Canada is trying to face economic reality (at least at the federal level, not so much at the provincial level) whereas there is only delusional thinking in Europe, the United States, and Japan.

    • The CPC has “bail-in” plans similar to that being used in Cyprus already in the works. See e.g. http://canadafreepress.com/index.php/article/54142 (I know it was on Macleans somewhere too but I can’t seem to find it right now).

    • Since 1975 Canadian governments have slowly (Mulroney put his foot on the gas) succumed to the Internation Banking Cabal and, as a matter of policy, have refused to borrow from the Canadian owned BofC at a token interest and instead have “gifted” the big six” (and select international banks) by borrowing from them at much higher rates. He also deregulated the banks, allowing them to feed in the international banking casino orgy of derivatives. This responsible conservative also eliminated Statutory Reserves with the BofC (at no interest) requirement in yet another gift to the cabal at the expense of the rest of the country.

      The result, the $40B deficit in 1975 has ballooned to $600B, with compound interest making up the lions share, and much of the federal budget going to servicing the debt instead of shoring up social services. We have been sold down the river by the international banking cabal, without as much as a whimper from our elected officials (who of course were personally rewarded in various nefarious ways) or the inept, subservient media.

      Canadian banks print money, and expand the money supply, every time they make a loan.

      Harper bailed out the banks with $70B purchase of toxic mortgages, then tried repeatedly to deny it!

      The Bail-in regime in the recent budget applies the same IMF written policy template the EU is using to recapitalize Cypriot banks on the backs of citizens savings accounts… and Harper has yet to step up and explain this atrocity, in plain English, to the people of this country!


  5. The most likely explanation is that economy is stumbling due to Harper’s mismanagement.

    All of the strengths the economy had were due to Liberal governance and policy:

    a) centrist banking regulation that prevented a financial market meltdown that crippled many other countries (that Harper was opposed to)
    b) sound fiscal management (Harper blew the $14B surplus before the recession hit on a GST tax cut economists hated)
    c) the stimulus package that cushioned the blow from the Great Recession (which Harper was against until his government was about to be voted down)

    The only thing Harper contributed was the housing bubble and record levels of personal debt. He did this by bringing in US-style mortgage deregulation: 40-year no-money-down mortgages.

    Harper ideologically believes that businesses create jobs, not government. But since polling and focus groups suggest that people believe otherwise, he tries to pretend he’s actually doing something with the economy through his “Economic Action Plan.” Yet all he has really managed to do is squander the advantages he inherited.

    • you nailed it. Unfortunately lots of people knew this years ago but their voices were not heard as they were shouted by the Harperites. The conservative party is a Party for the Rich or uninformed.

    • He did that on purpose because, “housing always goes up, it’s different here”. Right? What could go wrong?

    • You’re wrong on all counts. Why don’t you set your hatred of Harper aside for a minute and look at things objectively?

      a) Canada avoided the “financial meltdown” mainly be re-inflating the credit and housing bubble in 2008. This is an example of deferred pain, and with the massive housing slowdown underway, we’re about to see the downside. All political parties in Canada supported the actions that led to re-inflating the bubble. All were complicit. This whole false narrative of Canada avoiding the financial crisis is likely to soon be forgotten.

      Canada’s banks are an oligopoly. They’ve been bailed out multiple times, they enjoy a walled garden with minimal competition, and their biggest risks are backstopped by taxpayer dollars. The “stability” of Canada’s banking sector has very little to do with any “regulations” that were put in place to restrain banks, and everything to do with government policies that secure and maintain an oligopoly.

      b) Every developed nation on earth went into deficit spending through the global financial crisis. Most countries have reported record deficits. It’s highly disingenuous of you to talk about Canada’s deficits in isolation. Canada’s deficits have actually been smaller per capita than average — much lower than those in the U.S., the UK, and other places. Harper’s deficits have been relatively “conservative” compared to any of our western counterparts.

      c) How can you criticize deficit spending in one breath, and then chastise Harper for resisting deficit stimulus spending in another? Of course the other parties believed stimulus was the way to go — by your own admission, they all supported ‘blowing the surplus’, as you call it). Again, ALL major parties have been complicit in this.

      “He did this by bringing in US-style mortgage deregulation…”

      No. Just… No.

      In what confused, twisted world is the taxpayer guaranteeing risky mortgages an example of “deregulation”? The banks didn’t make these loans because they were “deregulated” — the banks made these loans because the government (via the CMHC) offered to insure such risky 0% down 40 year loans.

      The one U.S. regulation that might have limited the fallout from the mortgage crisis was the Glass-Steagall Act, which created a separation between investment banking and commercial banking. It was repealed under Bill Clinton. Canada used to have such a law too… It was repealed in the 1980s. Ditto for the UK.

      “Harper ideologically believes that businesses create jobs, not government”

      Everyone with a brain believes that businesses create jobs, because they do. Obama frequently says this, as do Justin Trudeau and Thomas Mulcair. Only the most dense communist fools think otherwise. Most noted socialist academics today would say that the private sector creates jobs, and governments have a role to play in helping that process along. Are you seriously saying you think otherwise?

      “he tries to pretend he’s actually doing something with the economy through his Economic Action Plan.”

      Um… The “Economic Action Plan” is the name for the stimulus program, which you said was a good thing earlier in your post. If the Libs or the NDP were in power, you can bet that program would have been even bigger. I think they openly admit this.
      Do you have any idea what you’re talking about? I think not.

      • “You’re wrong on all counts.”

        Tell that to The Economist:

        “Much of the country’s resilience stems from policies—such as bank regulation and sound public finances—which predate Mr Harper. ” (January 2010)

        Regarding stimulus: David Cameron caused a triple-dip recession in the UK with reckless austerity measures. If Harper had been allowed to take Canada down that path, he wouldn’t have been able to falsely brag during the 2011 leadership debate that “Canada has the strongest recovery on the planet” (ten times no less.)

        (Actually, our recovery ranked #7 of 31 OECD developed nations, based on GDP growth. #2 of the G7, with Germany leading the way.)

        • A lot of people feel the The Economist is often full of sh*t.

          Anyway, the false narrative of Canada’s superior banking sector has been circulating in the MSM for years… Doesn’t make it true. Look at the facts, not the rhetoric.

    • Very well said!!! The Federal government spent $21 million on their Economic Action Plan ads in 2010/2011 (http://www2.macleans.ca/2013/03/12/feds-spent-21m-on-economic-action-plan-ads-in-2011-12-annual-report/#more-359349) with a total ad budget of $83.3 million. That’s right. $83.3 million! For ads!!!! So if we just took that $21 million (taxpayer dollars) and divided it by our current population (approx. 35 million), the Tories have spent $600,000 per Canadian resident (or $2.38 million per Canadian if we consider their total ad budget) telling us how well things are going in our country all thanks to them. Imagine how our economy would have reacted if they just handed us that money instead.

      • Dude go back to grade 4 math class for a refresher

  6. Would anyone in their right mind trade our economy for the US’s economy if we also had to take their deficit? And I haven’t even mentioned their central bank (the “Fed”) with it’s stinking pile of toxic assets that it is still accumulating each month.

    • Canada doesn’t even have an economy. 40% of the Canadian “economy” is related to housing (which is unsustainable/artificial and is the result of cheap credit + gov’t backed mortgages). Canadians are in record levels of consumer debt. You can count on one hand how many Canadian companies there are that actually design and produce goods/services that are sold worldwide. Lets see here, RIM/Blackberry and Bombardier. Thats basically it. Oh I forgot Nortel, oh wait, nevermind lol. The rest of the economy is digging out of the ground, cutting down trees and raping the environment, and a huge, lazy public sector.

      Compare that with the USA – Apple, Google, Intel, IBM, Microsoft, Oracle, Hewlett-Packard, General Electric, General Motors, Ford, Coca-Cola, Pepsi, eBay, Amazon, Boeing, Lockheed Martin, Dell, General Dynamics, Facebook, Yahoo! Cisco…I can go on forever. Their housing has corrected, consumers deleveraged. Things are looking up for the USA and down down down for Canada. Go ahead and compare the TSX vs S&P, Dow, Nasdaq.

      I would invest in Canada, I really would, I live here, but there is nothing to invest in.

      • lol you clearly don’t dont know the value of oil

        • “Oil! Yay!!! We’ll sell that forever and ever! We’ll be rich! It’s all we’ll ever need!!”


          • Oil has value. Facebook ads? Not so much.

          • Facebook is a useless pos timewaster, BUT, it brings in nice advertising profits from other countries. What do you do with oil once its all gone? (some predict 50 years, who knows who to believe). Does it still possess value after it has been used up?

        • The anti-industrialist communists are working overtime to shut down the oil sands. No Keystone XL = oil sands dead in the water. Bad news all around.

          And yes, most of Canada’s economy is fake. Housing/credit account for almost all of the growth in the last decade. Aside from oil growth, the rest of the “real” economy has shrunk — just look at manufacturing and innovation. A huge portion of our economy is tied to branch plants and domestic oligopolies. If we don’t start getting on the right path soon, we’ll be back to the doldrums of the low productivity, low growth 1990s (or worse) minus the strong manufacturing base. Yikes.

      • If their corporate giants were such stalwarts, the Fed wouldn’t need to be purchasing billions in debt each month to keep their valuations rising.

        Oh, and by the way, Facebook is a fad which produces absolutely nothing and has no intellectual property to speak of. GM was bankrupt just 5 years ago, and is still largely owned by the US government. Hewlett Parkard is a ghost of its former self, its core business (desktop PCs) up for sale, not that there are any buyers. As for Yahoo!, they should have dropped the exclamation point long ago.

        eBay and Amazon are certainly success stories, but in fact, they’re not much more than really big stores. They don’t produce anything, invent anything (other than new ways to buy things that already exist) and no economy will boom forever based on consumer spending alone, regardless of how novel the approach.

        You sound like I probably did circa 1999. I once believed that a booming stock market represented real growth and real opportunity. Looking back now, it was a casino. It remains so today. And the house (Wall Street) will win eventually. Even if they need another massive taxpayer bailout.

        • Facebook is a pos but it brings in ad revenue from countries all over the world. HP is the world’s largest PC manufacturer. eBay and Amazon bring in revenue from around the world. They bring in money from other countries, which is a good thing for the US economy. Canada has very very little of that, but it has housing! When it comes down to it, the only 2 economies that do this are the USA and Japan. They both operate on innovation and creativity.

          What represents real growth and opportunity then? Canadian housing? Gold? Its a sad fact but Canada has nothing after oil and rocks and building housing. Housing is over, so what now oil and rocks? What do we do after that?

          • I agree that we are far, far too reliant on the housing sector, and we will pay a huge price for that. We’re already starting to pay it in fact. And yes, the US has already undergone their housing bust and at least a partial deleveraging. This is all true. But…. the US has many problems that are not so easily solved, and many of them are being papered over by current monetary and fiscal policies. That’s true to a lesser extent in Canada too.

  7. Doom and gloom, yet in a story by canada com Canadian manufacturing is booming. Who to believe, who to believe….

    • Canadian manufacturing is booming? What are we making besides houses?

  8. This could all be quickly fixed if Harper would just spend some more money on Economic Action Plan ads.

  9. We can thank obama and the environmentalists down south who have stalled on the Keystone pipeline for so long, that has sapped Canadian budgets for health care, education etc……….and I thought he cared about jobs………right………

    • “It’s Obama’s fault!!”

      Pretty sad and pathetic economy if one pipeline can bring it all down.

  10. “But most economists have settled on a marginally more palatable outcome: an extended period of little or no growth.”

    Just like in the US, where the consensus from bank economists, university economics professors and financial pundits was there would be no sharp drop, just a levelling out of prices…

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    • ^^^^^SPAM

  12. The problem is the socialist government of Ontario and Quebec have not been doing anything to help Canada maintain necessary economic growth. The Alberta locomotive can pull the free-loaders along only so far.

    • Ontario and Quebec’s governments are already insolvent, Quebec provincial debt is in the range of 250 billion, and Ontario is up to some 270 billion or so. They actually can’t afford to do anything or they will be nearing default.

    • Don’t forget that it was once Ontario that was keeping all the have not provinces afloat. And why is growth “necessary”? It isn’t. What we need is economic shrinkage to improve ecological sustainability. If we fail to do this we will have no economy in the end anyway.

  13. The US economy is NOT recovering as the latest job reports are a disaster. The Stock market is rising as a result of QE.

  14. Taxes. Are killing the canadian economy. We make good money but when we pay 50 pcnt to subsidize govt. when I have to shop on amazon.com to avoid duties and taxes on goods I’m keeping Americans employed I’m not happy doing it but i need to offset the cost of the abusrd taxes /surcharges and tax increases. Wake up Canadians we are getting robbed every day n it’s costing canadian jobs.

    • you are not happy to shop amazon.com? but you have to? to offset absurd taxes is your reason?
      go and rot in hell you son of a whore.

      yeah….. i mean it you shit head

    • i want god all mighty to strike you down with all powerful strength of the heavens, kill any bastard who shops on Amazon! What a fucking imbecile.

      fuck off out of canada now and go live with the mexican gypsy usa people where you belong.