Old habits die hard in the Canadian economy

In his final address as governor of the Bank of Canada, Mark Carney concluded: “We cannot grow indefinitely by relying on Canadian households increasing their borrowing relative to income. Nor can residential investment remain near a record share of GDP, particularly given signs of overbuilding and overvaluation in segments of the real estate market.”

Obvious as that may sound, growth by debt has been Canada’s only real game plan under Carney. Weaning ourselves off that addiction will be the single greatest challenge facing the country in the coming years, as interest rates begin to rise—expected some time in 2015—and the housing market cools.

Can it be done? The latest economic data would seem to offer some measure of hope.

Canada’s economy grew at an annualized rate of 2.5 per cent in the first quarter, better than expected and better than the 2.4 per cent in America, which has been in the midst of a healthy rebound lately. (This comes as housing sales dropped three per cent in April from the same time last year and prices, according to a Reuters poll last week, are forecast to drop five per cent in the next few years.)

The growth last quarter was attributed largely to a jump in exports—mostly energy products, which were up 22 per cent on an annualized basis. Exports of crude to the U.S. hit their highest level in February in two decades, said the U.S. Energy Information Administration. For Canada to thrive in a period of rising rates and a cooling housing market, it must, as Carney said, “rotate the sources of growth” toward things like exports.

But trading our addiction on easy money for an addiction to oil is a risky bet. The U.S. is now awash in its own reserves—it already tops Russia as the biggest exporter of refined petroleum—and the future of the Northern Gateway (nixed by B.C. last week) and Keystone XL pipelines (mired in U.S. politics) is as murky as ever. Aside from exports, Canada’s economy is still limping. Domestic demand was up just 0.1 per cent last quarter, the worst showing since 2009. Few economists expect next quarter’s results to be as rosy as the last.

So where does that leave Canada? For the time being, still reliant on low interest rates and its housing market. Old habits die hard.