Welcome to the fifth annual edition of Maclean’s Charts to Watch.
When we assembled our last charts package for 2018, one of the most frequent topics was the fate of NAFTA. For good reason. The surreal negotiations to remake the trade agreement dominated the headlines throughout much of the past year. With the signing of the (insert your preferred name here) trade deal between Canada, the U.S. and Mexico, NAFTA has taken a back seat to other economic anxieties as the new year approaches.
That’s evident from this year’s collection of charts to watch in 2019, as chosen by some of the top economists, analysts and business experts in the country. The worries are many, and include rising interest rates, dramatically slowing household credit, Alberta’s oil crisis, U.S.-China tensions and the state of business competitiveness in Canada. You’ll also find charts on the fight against poverty, the rise of the digital economy, B.C.’s plague of forest fires and the evolving role of dads.
We asked each contributor to submit a chart along with their explanation for why it will be important to watch in the year ahead, and present them here in no particular order. We hope you find their insights as engaging and fascinating as we did. Share your thoughts with the hashtag #ChartWeek, and enjoy.
Interest costs are rising sharply
George Pearkes, macro strategist, Bespoke Investment Group (@pearkes)
“Canadian debt levels are relatively high, and Canada is emerging from a period of prolonged low rates. As a result, what had been very low interest costs are starting to rise, and because rates had been low the percentage changes are quite large. While there doesn’t appear to be an obvious calamity waiting around the corner, consumers are seeing the dollars they send out the door in interest payments rise at a much faster clip than they’re used to. As rates rise, base effects will naturally put a lid on the growth of these payments (because assuming similar debt levels, a rate rise from three per cent to four per cent results in 33 per cent more interest paid, while a rise from four per cent to five per cent results in 20 per cent more interest, and so on), as well as any deleveraging the Canadian consumer might undertake. Still, the Bank of Canada needs to be (and in fairness, is) aware that this tightening cycle is relatively unique and there could be a much larger effect on consumer spending or investment (real estate) than there has been historically thanks to the base effects of very low rates.”
Canadian stocks look cheap
David Rosenberg, chief economist, Gluskin Sheff and Associates (@EconguyRosie)
“The macro news in Canada may indeed be bad, but that bad news is likely already in the price. Consider for a moment that there has been no bull market north of the border this cycle as there was in the United States. The Canadian stock market is no higher now than it was in the summer of 2008—ten years of nothing but a whole lot of volatility and your reinvested dividend in the blue-chip banks. Yet corporate earnings have risen more than 30 per cent over this time frame, with nothing to show for it from a market price standpoint. In other words, the Canadian stock market is cheap. Dirt cheap. The forward price-earnings multiple (p/e) is beginning to resemble that of an emerging market, and no, despite our challenges, we are not anywhere close to being an emerging market. Not yet, anyway. That p/e multiple has compressed all the way down to a mere 13.3 times, the lowest it has been in well over five years and the two-and-a-half percentage point discount that the S&P/TSX Composite Index trades at currently vis-à-vis the S&P 500 is the widest the valuation gap has been since June 2004 (normally, both markets trade with the same multiple). Canadian bears may want to dig into the history books because in the year that followed, the TSX rallied 16 per cent versus 4.5 per cent for the S&P 500. That was as tough a sell then as it is today, but either you believe in reversion-to-the-mean, or you don’t.”
Can Alberta get fair value for its oil?
Andrew Leach, associate professor, University of Alberta’s School of Business (@andrew_leach)
“For the third year in a row, I’ve chosen an oil sands bitumen differential chart. In 2016 and 2017, I felt that the looming fights over pipelines and the increasing discounts faced by Alberta crude would be a flashpoint. In the past year, we’ve seen first the Keystone spill and more recently the combination of refinery outages in the U.S. and increased production in Canada’s oil sands lead to record discounts. On December 2, Premier Notley announced measures to curtail Alberta production to address these discounts and to match Alberta production more closely to provincial pipeline and rail export capacity. The last data point on the graph is from noon the day after her announcement. The Premier also announced a government program to procure more rail cars and locomotives to act as an alternative to perennially stalled pipelines. Last year, I suggested that a return to the days of the bitumen bubble might spoil the party in Alberta. This year, it’s happening and we’ll watch how this chart evolves over the 2019 year to see whether the Premier’s moves will reduce the discount and see Alberta capture fair value for (less of) its oil.”
The outlook for inflation looks calm
Sal Guatieri, senior economist, BMO Capital Markets
“Inflation will figure prominently in the Bank of Canada’s policy decisions in 2019. The Bank aims to gradually return rates to neutral levels, but the pace will depend on whether prices pick up or remain well behaved. Core inflation has turned higher in recent years as the economy returned to full employment, but it has steadied recently around the two per cent target. We expect it to stay calm in 2019, held down by automation and globalization, though the low loonie implies some upside risk.”
Higher debt and interest rates will impact federal spending
Kevin Page, president and CEO, Institute of Fiscal Studies and Democracy at the University of Ottawa
“Over the past ten years, federal debt has increased by $214 billion (or 47 per cent) to $671 billion in 2017-18. According to the Fall Economic Statement 2018, federal debt is projected to increase by an additional $93 billion to $764.7 billion in 2023-24. Interest rates (short and long) are assumed to increase by about 100 basis points over the medium term planning period according to the average private sector forecast. It should not be a surprise that the fastest growing federal spending component is interest on the public debt. In dollar amounts, from 2015-16 to 2023-24, interest on the public debt is projected increase by $12.5 billion on an annual basis. This is much greater than the annual increases of spending for the government’s signature initiatives to support the middle class – Children’s Benefits (up $8.1 billion) and the Investing in Canada Infrastructure Plan (up $8.4 billion).”
Canada’s labour market mismatch
Krishen Rangasamy, senior economist, National Bank of Canada
“Canadian employers are finding it increasingly difficult to find qualified workers. The job vacancy rate — the number of job vacancies as a share of the sum of all occupied and vacant jobs — jumped in the second quarter to 3.4 per cent, the highest on records. And that was despite little change in the jobless rate. So much so that the Beveridge curve, the relationship between the jobless rate and the job vacancy rate, is now moving away from the origin. That typically suggests the labour market is becoming less efficient via a worsening of the skills mismatch problem.”
Rise of the electric vehicle
Kirsten Smith, visiting researcher, Asia-Pacific Energy Research Centre (@kirst_nicole)
Canadian electric vehicle sales (plug-in hybrids and battery electric vehicles) as a share of total vehicle sales are on track to breach the two per cent threshold in 2018. According to FleetCarma, Canada has sold over 38,000 electric vehicles through October of this year. At current rates, they estimate Canada will sell more EVs in 2018 than in the previous three years combined. The three most popular models were the Tesla Model 3, the Nissan Leaf and the Mitsubishi Outlander.
As of last year, the stock of electric light-duty passenger vehicles has risen to more than 3.1 million globally. In 2017, more than one million EVs were sold around the world, with 580,000 sold in China alone and almost 200,000 in the United States. Policy changes, such as those regarding vehicle emissions standards in the EU and penetration of new energy vehicles (plug-in hybrids, battery electric and fuel-cell electric vehicles) in China have been driving uptake. Seven countries have further announced bans on the sale of internal combustion engine vehicles by specific dates between 2025 and 2040, and following suit, major auto manufacturers have developed and publicized electrification strategies.
As Canada has worked hard to decarbonize its electricity sector, increasing the uptake of EVs is an opportunity to build on those prior gains. Electrifying the transportation sector, which was responsible for 25 per cent of Canada’s greenhouse gas emissions in 2016, will enable Canadians to further reduce their GHG footprint even if, thanks to market trends, that isn’t the motivating factor behind the purchase decision. Significant battery price declines, improvements in vehicle range and increased choice in available models have opened the electric vehicle market up to new consumers and have made electric vehicle sales a trend to watch in 2019.”
Will coal make a comeback in Alberta?
Blake Shaffer, Post-doctoral Fellow and Fulbright Scholar, Stanford University (@bcshaffer)
“Jan. 1, 2018 saw big changes to Alberta’s electricity market. A new large emitter climate policy—the Carbon Competitiveness Incentive Regulation—switched from facility-specific benchmarks to sector-wide ones, resulting in large cost increases for coal power producers. Coupled with early retirements of some coal plants, and temporary “mothballing” of others, this led to a large drop in coal power generation.
At the same time, 2018 saw Alberta breaking new records for power demand. Year-to-date demand is up nearly four per cent as compared to the same period a year ago. This combination of higher demand and lower (coal) supply has led to a rebound in power prices.
What to watch for 2019: As an election looms, and the poll-leading UCP vowing to undo the NDP’s climate policies, will we see a reversal in coal’s fortunes? If a new government returns to the old Specified Gas Emitters Regulation (SGER) or simply defaults to the proposed Federal large emitter policy, which is very generous to coal power, will 2018’s decarbonization of Alberta’s electricity fleet be… fleeting?”
A higher debt service burden is manageable
Will Dunning, housing market consultant (@LooseCannonEcon)
“For over a decade now there have been spates of great concern about what will happen “when interest rates inevitably increase,” at which time, the line of panicked reasoning goes, Canada must fall into an economic crisis, since Canadian mortgage borrowers will no longer be able to afford their payments.
Well, interest rates fell during the next 8.75 years. Eventually, they did start that inevitable increase, starting during the summer of 2017. At that time, a typical “special offer” rate for a five-year fixed rate mortgage was 2.6 per cent. As of early November 2018 it was 3.5 per cent. By the way, when this conversation started in September 2008, the typical rate was 5.25 per cent.
Higher interest rates are gradually increasing the burden of servicing mortgage debt. For the second quarter of 2018, the mortgage debt service ratio was 6.51 per cent of disposable income (versus the long-term average of 5.98 per cent). As Canadians renew their mortgages, the debt service burden will continue to creep upwards.
A mortgage payment includes two components—the interest cost and repayment of principal (which is a form of saving). My favourite chart for this year separates those components.
The interest part has indeed increased recently, but is still at a very low level in historic terms. On the other hand, the savings component (principal repayment) is at a historically very high level. This data tells me that Canadians have a lot of capacity to handle higher mortgage interest rates. When mortgage renewals create challenges, in very many cases, it should be possible to solve those problems by adjusting the amortization schedules and reducing the amounts of principal repayment.”
Household credit’s drag on growth
Eric Lascelles, chief economist for RBC Global Asset Management (@RBCGAMChiefEcon)
“Canada’s economic success over the past 15 years was supported in significant part by a booming housing market. However, that backdrop is now changing. Household credit growth is swooning due to a potent combination of rising interest rates, poor affordability and tighter housing rules. In turn, the Canadian economy may sparkle less brightly going forward.”
Wages are finally moving in the right direction
Randall Bartlett, chief economist, Institute of Fiscal Studies and Democracy. (@Randall_Bartlet )
“It’s been a big year for monetary policy in Canada, with the Bank of Canada having hiked rates three times since the start of 2018. That’s the most frequent annual pace since 2010. And there is good reason for it. Economic growth topped three per cent in 2017 and is on track to beat two per cent this year. By most estimates, the economy is back to operating at its trend, a view supported by the Bank’s measures of underlying consumer price inflation circling its two per cent target. Add to this an unemployment rate than is near historic lows and the highest level of labour shortages since before the Great Recession, and many would say you have a recipe for rapidly rising wages.
Unfortunately, this hasn’t been the case. According to measures examined by the Bank of Canada, wage growth is currently stuck in roughly the two per cent to three per cent range (year-over-year). And when you strip out the noise in the data, the Bank puts underlying wage growth—known as wage common—at 2.3 per cent in the second quarter of 2018. Not bad, although no better than the pace of inflation. But there is hope. The Institute of Fiscal Studies and Democracy publishes a short-term forecast of the Bank of Canada’s estimate of wage common. This puts the outlook for underlying wage growth at 2.5 per cent and 2.6 per cent in the last two quarters of 2018, respectively. While not a dramatic improvement, the trend is moving in the right direction, and should support continued interest rate hikes in 2019.”
Auto sales point to a slowdown for the economy
David Doyle, head of North America strategy and economics research, Macquarie Group
“Much attention for Canada in 2019 will deservedly be focused on housing, a structural imbalance that should impose limitations on growth for several years and continues to pose a downside risk to the outlook.
Auto sales volumes may provide a leading signal of where housing and the broader economy are heading. This is another significant structural imbalance that, like housing, also faces headwinds from higher interest rates. Relative to the working age population, auto sales are as stretched as they were in the late 1980s, a period that was followed by a roughly 25 per cent peak to trough decline. This suggests significant potential downside could lie ahead.
Of concern, auto sales volumes are now rolling over. 2018 is poised to be the first year with declining auto sales volumes since 2009. What’s more, the monthly trend is worsening with sales for August to October down four per cent year-over-year. Struggling sales volumes suggest a multi-decade consumer leveraging cycle that may be starting to reverse course, a troubling sign for Canada.”
Alberta’s uneven economic recovery
Trevor Tombe, assistant professor of economics, University of Calgary (@trevortombe)
“Economic recoveries take time. But for Alberta’s young men, it hasn’t even started. After two years of job losses, the economic recovery finally began in late 2016 and employment rates for most Albertans have gradually improved ever since. Prime-age men (25-54 year olds), for example, have recovered nearly three quarters of their recessionary losses. But for young men (24 and under) the situation is no better today than it was two years ago. This group was hardest hit by job losses in oil and gas, construction, and manufacturing — especially those with lower levels of education — and adjustment is proving difficult. Will economic recovery finally reach all Albertans in 2019? This is the chart to watch.”
Foreign investors are shying away from Canada
Brendan LaCerda, Canada economist, Moody’s Analytics
“Escaping the headlines, net foreign investment in Canadian financial securities has slowed precipitously in 2018. As of September, the year-to-date net foreign flow of funds has weakened to a ten-year low. The uncertainty surrounding the future of NAFTA and the rising discount on Canadian oil prices against U.S. benchmarks reduced appetites for Canadian financial assets in the first three quarters of 2018. The successful resolution of trade negotiations and rising interest rates should aid the recovery of foreign investment, but the measure is worth keeping a close eye on. Absent foreign demand, Canadian asset prices will not appreciate as strongly. Depressed foreign investment also threatens to stunt spending on capital, harming overall economic growth.”
Who’s on diaper duty
Tammy Schirle, professor of economics, Wilfrid Laurier University (@tammyschirle)
“For 2019 there are plans to introduce further expansions to EI parental leave, designed to encourage a second parent to take time away from work. In the long run, economists expect the so-called “daddy quotas” to alter how parents define family caregiving roles in ways that support opportunities for mothers and fathers in the home and the labour market. We see evidence of this working in Quebec. But first, I simply want to see if fathers across Canada will take parental leave more often. In the data, this may appear as an increase in the proportion of men with young kids that are classified as employed and absent from work. Will more dads take on diaper duty in 2019?”
Wage gains should help with rising debt service costs
Dawn Desjardins, deputy chief economist, RBC Royal Bank
“Household debt service payments increased aggressively in 2018. Interest rate hikes packed a bigger-than-usual punch given the large stock of debt on household balance sheets. Fortunately, household incomes also grew at a solid clip, taking some of the sting out of the jump in expenses. But with more rate increases likely in 2019, debt service costs will continue to grind higher, leaving less money to spend on other things. Tight labour market conditions should put upward pressure on wages in 2019, tempering the strain for most households and enabling consumers to keep on spending, albeit less vigorously than in years past.”
Canada’s online labour market punches above its weight
Armine Yalnizyan, senior economic policy advisor to the deputy minister of Employment and Social Development Canada, and the Atkinson Fellow on the Future of Workers (@ArmineYalnizyan)
“Digital technologies accelerate the unbundling of jobs into tasks, making more white-collar and professional work amenable to being conducted online from anywhere in the world. If online labour is the future for a growing number of workers, how quickly is the future advancing? The Online Labour Index offers a first attempt at providing real-time answers. It shows this first truly global (English-speaking) labour market expanded by 25 per cent from May 2016 to November 2018 (as shown in the top chart). The real eyebrow-raiser: Canada’s share grew most rapidly (bottom chart) more than doubling from 4.1 per cent to 8.5 per cent of this measure of the global demand for online labour.
The Online Labour Index is a project of the Oxford Internet Institute of Oxford University. It tracks the daily change in the number of vacancies posted on the six largest English-speaking online labour platforms. These aren’t apps for place-based services like Uber and Airbnb, but services conducted exclusively online—the buyer and seller of the work are matched online, and the contract is completed and paid for online. Most of the labour bought and sold in such markets involve: software and technology development; creative and multimedia; writing and translation; clerical and data entry; sales and marketing; professional services (accounting, legal, engineering, etc.). Both Canada’s demand for and supply of online labour is remarkably large compared to the size of our labour market, which—at 19.7 million people—is only 0.6 per cent of the global labour market (3.5 billion people in 2017).”
Finally, a poverty plan. But will it work?
Lindsay M. Tedds, associate professor, department of economics, and scientific director of fiscal and economic policy at the University of Calgary’s School of Public Policy (@LindsayTedds)
“Despite a long history of governments in Canada making commitments to reduce poverty, progress has been slow and halting. Part of this is due to the fact that Canada has, historically, not had an official, government mandated poverty line. Other reasons are that governments have not: 1) set clear poverty reduction targets to meet, 2) developed a comprehensive strategy to meet those targets, and 3) aligned policy and spending with the available evidence related to measures that end the intergenerational cycle of poverty. This situation came to an end in 2018 with the federal government releasing a poverty reduction strategy that set an official, government mandated poverty line based on the market-basket measure, set clear poverty reduction targets that will be enshrined in legislation, and has tabled a poverty reduction strategy that sets out initial steps towards these targets with regular reporting and monitoring. Soon after the federal government set out their strategy, B.C. followed suit by setting targets to the new official poverty line and also enshrining those targets in legislation.
The graph here shows the chosen official, government mandated poverty line, as measured by the market-basket measure, along with these two governments’s targets. The blue solid line shows the percentage of people living under the poverty line in Canada. The blue dotted line shows the path to the federal targets. The first target commits Ottawa to reducing the percentage of those living under the poverty line from 12 per cent in 2015 to 10 per cent in 2020. The second target commits Ottawa to reducing the percentage of those living under poverty to six per cent by 2030. B.C. has two targets: an overall measure (orange) and one related particularly to children (grey). These targets commit B.C. to reducing the percentage of those living under the poverty line from 12 per cent in 2016 to nine per cent in 2024. For children, B.C. has a set a target of six per cent for 2024. B.C., however, has not yet set its strategy for doing so. The first B.C. poverty reduction strategy is set to be tabled by March 31, 2019.
Whether these governments meet their commitments is unclear. Certainly, Ottawa’s targets, particularly its 2020 target, have been criticized as being unambitious. B.C. has been criticized for setting targets without a clear plan. Both have been criticized for not enough attention to targets related to the depths of poverty. While these governments should be lauded for finally taking clear steps toward poverty reduction and for establishing accountability targets, whether these targets will be met, whether meeting these targets can be sustained, and whether these governments will tackle the more complex drivers of severe poverty remains to be seen.”
Interest rates and stock markets: the long view
Livio Di Matteo, professor of economics, Lakehead University
“Over the last decade, we have grown accustomed to historically low interest rates as well as a stock market which, despite its short-term ebbs and flows, continues upwards. Given that interest rates have begun to creep upwards, there may be concerns that higher interest rates will eventually depress stock markets. Yet, the longer-term view does not seem to bear this out. The accompanying figure presents long term interest rates (yield on 10 year government bonds) and an index of stock prices (1990=100) both from the Jordà-Schularick-Taylor Macrohistory Database for the period 1945 to 2016 with updates to 2018 from the Bank of Canada and Yahoo Finance. Long-term interest rates rose steadily from 2.9 per cent at the end of WWII to peak in 1981 at 15.2 per cent and have since declined to an estimated 2.3 per cent so far in 2018. The average long-term interest rate during the 1945 to 2018 period was approximately six per cent. For the period 1968 to 1997, when the long-term interest rate was above the six per cent average, the average annual growth rate of stock prices was eight per cent. For the period prior to 1967, the growth rate of stock prices was about seven per cent while for the period since 1997 it has been five per cent. From 1945 to 1981—an era of rising rates—the implied annual growth rate of stock prices was 6.1 per cent while during the downslope since 1981, the implied growth rate was 5.1 per cent. Something to keep in mind given interest rates are expected to continue rising in 2019. In terms of what to expect for next year, despite the recent increases interest rates will still remain at historic lows. As for the stock market, based on past performance, the long-term trend is up.”
U.S. tax reform puts Canadian SMEs at a disadvantage
Jack Mintz, President’s Fellow, School of Public Policy, University of Calgary (@jackmintz)
“Most of the discussion about business competitiveness tends to revolve around large businesses. Small business competitiveness also matters since many entrepreneurs and skilled labour have a choice of living north or south of the Canada-U.S. border. After U.S. 2018 reform, Canada is now out of sync with the United States when it come to taxation, never mind economic disadvantages such as the large markets, higher incomes and warmer temperatures in the U.S. In the table shown below, the effective corporate and personal tax rate on new investments is measured for small ($10 million in asset size) and medium ($20 million in asset size) businesses. Typically, one compares corporate income tax rates in Canada and United States (see this, for example) but this is quite misleading. In the United States, until recently, most small businesses were set up as S-corporations which pay no corporate tax (except for a few states) since the income is attributed to owners and taxed at the personal level. Instead, one must look at both corporate and personal income taxes paid by entrepreneur on income derived by their business.
After 2018, Canada taxes entrepreneurs much more than the United States. The personal income tax rates in the U.S. are much lower and the U.S. now provides a special 20 percent deduction from qualifying business income that reduced further the personal income tax rates. Land transfer taxes are also higher in Canada than the United States. The one advantage Canada does provide is with respect to sales taxation. Under the GST and HST, capital purchases are not subject to tax which is not the case in the United States where most states levy retail sales taxes that also is levied on capital goods.”
Trouble ahead for miners
Scott Barlow, market strategist, Globe and Mail (@SBarlow_ROB)
“The comparison of global manufacturing activity and commodity prices is a simple chart that covers a lot of ground in terms of investment risk for 2019. The implications for domestic mining stocks are obvious—the sharp decline in metals prices in 2018 that limited profits for mining companies has been verified by falling world manufacturing activity and its negative effects on commodity demand.
The J.P. Morgan Global PMI Manufacturing Index is likely to prove an important monthly data point for a year when global economic growth forecasts are now being slashed. In a November 18 report, Bank of America Merrill Lynch not only cut their global growth projections from 3.8 to 3.6 per cent for 2019, but also added that ‘risks are skewed to the downside’ because of central bank monetary tightening.
Commodities are priced in U.S. dollars so the chart will also be helpful in gauging the effects of a stronger greenback. Currencies in the developing world—the economies where the rate of global resource demand growth is largely determined—devalued sharply in 2018, making commodities more expensive in local currency terms. The extent to which these higher prices suppress resource demand should be apparent in the chart over time.”
Why wages have yet to take off
Philip Cross, senior fellow, Macdonald-Laurier Institute
“With the aging of the population, the unemployment rate becomes a less useful measure of labour market conditions. While the unemployment rate has fallen to its lowest level in decades as older workers retire, the share of working-age Canadians holding a job has levelled off. This partly explains why wages have not taken off in response to low unemployment.”
A non-permanent boom in Canada’s population
James Marple, senior economist and director, TD Economics (@marpelino)
Canada is in the midst of a population boom. Over the past year, the Canadian population is estimated to have grown by 1.4 per cent—the fastest rate in over 27 years. Less discussed was another record set—nearly a third of that increase was due to a growth in the number of non-permanent residents. Many of these new temporary residents are students, filling seats left in university classrooms by a dearth of 18 to 24 year Canadians. With the U.S. becoming less accepting of migrants of all sorts, Canada has become an increasingly attractive option. The share of the Canadian population here on temporary visas has hit a record-high of 2.6 per cent of the total population.
The question is what happens to these non-permanent residents. The last time Canada saw such a big increase in non-permanent residents, it was reversed in the following years (the recession of the early 1990s had something to do with this). At a minimum, the pace of growth in non-permanent residents is unlikely to be maintained indefinitely and unless there is a change in the number of permanent residents that Canada accepts, the rate of population growth is likely to slow.”
No major concern with excessive condo overbuilding
Sébastien Lavoie, chief economist, Laurentian Bank Securities
“Stricter mortgage regulation and higher interest rates has eased demand for new residential units in 2018, even for the relatively less expensive condo segment. Absorption of new condo units is modestly declining while the number of units currently under construction remains elevated. Thus, at the national level, it would take about five quarters to unwind the new condo supply coming down the pipeline and current unsold units. Our metric assumes the current pace of sales stays intact, although the Bank of Canada aims to increase its policy rate further.
The good news? There is no sign of excessive overbuilding in major centres, just a slight increase in the amount of slack in the Toronto and Calgary markets due to weaker absorption. Vancouver’s new condo supply is near an all-time high due to the past increase in homebuilding, and has been higher since the imposition of the foreign buyer tax in 2016. Montreal’s market clearly stands out from the pack as fewer units available on the tight resale market push households to purchase a brand-new condo. Our forecasts for 2019: Developers will stay busy but the pace of housing starts should ideally edge down by about five per cent from 2018 in order to prevent a ramp-up in new condo supply; home prices should increase modestly above the CPI inflation rate of two per cent.”
Residential investment at this level has never ended well
François Dupuis, chief economist, Desjardins Group
“The relative significance of residential investment in the Canadian economy has greatly increased since the early 2000s. This increase can be largely explained by changes in relative prices as real estate prices have risen much more than other components of the economy. At 7.5 per cent in 2018, the ratio is exceptionally high, historically speaking. This is reflective of a certain imbalance in GDP, which is fuelling concerns about an eventual slowdown in the housing market in a context of rising interest rates, tightening of credit rules in Canada, and deceleration of the global economy. In the past, this ratio has tended to correct abruptly when it reached one standard deviation. The ratio is currently near two standard deviations, a level that has never been reached in the past 60 years!”
A risk of a recession in 2019
David Wolf, portfolio manager, Fidelity Investments
“Interest rates have been going up. Canadians are more indebted than ever. Putting the two together, the period ahead is likely to be challenging for the Canadian economy. This chart puts a picture to that, showing that changes in Canadians’ real mortgage interest burden (inverted in the chart) leads growth in GDP by nearly a year—in other words, the higher that burden, the weaker the economy will tend to be. The historical relationship suggests the risk of recession in Canada in 2019, a risk that will intensify if interest rates continue to rise.”
The renewed appeal of short-term bonds
Kurt Reiman, chief investment strategist, Blackrock Canada
“During much of the post-financial-crisis period, yields on shorter-maturity bonds failed to compensate investors for inflation. In other words, real interest rates were negative. After successive rate hikes by the Bank of Canada and the U.S. Federal Reserve, short-term interest rates now offer investors a positive real yield, which creates competition for capital and has likely contributed to recent bouts of stock market volatility. We think allocations to short-term government bonds benefit investors in three important respects: they provide higher yields than cash, they offer lower interest rate risk than longer-maturity bonds, and they provide ballast for the portfolio during periods of elevated uncertainty and financial market volatility.”
Morneau’s misguided $14 billion bet
Toby Sanger, executive director, Canadians for Tax Fairness (@toby_sanger)
“In response to Trump’s corporate tax cuts, Finance Minister Bill Morneau’s Fall Economic Statement provided Canadian businesses with tax breaks worth $14 billion over five years, allowing them to write off the costs of capital investments much more rapidly. These tax breaks were warmly welcomed by business groups, but will they actually work in economic terms, by stimulating business investment?
Steep cuts to corporate income tax rates and other taxes on business over the past two decades have slashed Canada’s marginal effective tax rate (METR) on new business investments from over 44 per cent to less than 20 per cent, yet our rate of business investment in machinery and equipment has also plummeted, from seven per cent of GDP in 1998 down to 3.8 per cent last year. These tax breaks will reduce the METR for Canadian business investments down to 13.8 per cent, less than a third of what it was twenty years ago.
There are good reasons to be skeptical this latest round of tax breaks will stimulate business investment over the longer-term, and will fail just as previous rounds of corporate tax cuts have. Many other factors other than corporate income taxes are more important in business investment decisions. Our economy is changing in ways that make capital investments less important, as it evolves into a form of Capitalism without Capital. Businesses are increasingly substituting contracted-out services for capital investments. The largest, fastest growing corporations and many new economy businesses have little in the way of traditional capital investments.
We need to move beyond regressive tax cuts looking through the perspective of the last century and design a more progressive tax system for the 21st century.”
A tighter squeeze for taxpayers
Aaron Wudrick, federal director, Canadian Taxpayers Federation (@awudrick)
“Keeping an eye on the federal debt is important because more debt means more interest payments, and less money for programs, services or tax relief. Interest rates are likely to rise, meaning those payments are also likely to grow. Throw in an aging population and it all adds up to a rising tax burden on future taxpayers. It’s also notable that the debt is still rising even while the economy is strong, meaning if the economy slows down it could mean even more debt and a tighter squeeze for taxpayers.”
All paths lead to slower growth
Beata Caranci, chief economist, TD Economics (@TD_Economics)
“The Bank of Canada is well into a rate hiking cycle and has signaled more to come in 2019. With five rate hikes under their belt since mid-2017, it’s been over a decade since Canadians have seen an adjustment of this magnitude. By all accounts, the level of rates is well below historical averages. However, the central bank has never faced this degree of household leverage. In the final stages of policy normalization, they will need to walk a fine line between household finances and economic stability.
The amount of income dedicated to servicing debt will rise and possibly match or eclipse the previous pre-recession peak. Falling mortgage rates through much of the past decade have kept the debt service ratio in check even as the amount of debt mounted. We are on the other side of that cycle now. As monthly payment obligations rise, history demonstrates that some households will extend amortization periods or scale back accelerated payments in order to mitigate the ‘payment shock’ to their everyday finances. This would place us on the trajectory of either Scenario 1 or 2 in the graph, which we deem the most likely paths. Importantly, these scenarios also assume a significant slowdown in household credit growth. However, if this occurs to a lesser degree or if households do not extend payment periods, then Scenario 3 becomes the likely trajectory. Regardless of the path, all lead to the same destination. Households will have less of their income to dedicate to other areas, which is expected to place Canada on a slower growth trajectory than recent years. Interest-rate sensitivity tops the Bank of Canada’s watch list for risks and they will react accordingly to its evolution.”
Low-income children are missing out on a crucial benefit
Jennifer Robson, associate professor of political management, Carleton University (@JenniferRobson8)
“Which kids in Canada will get to finish high school and start college, trades training or university? That’s a question that should worry us all because it will shape future productivity and inequality. When they came into office, one thing the Trudeau government pledged to do was to make it easier for low-income kids to get the Canada Learning Bond (CLB)—a savings bond worth between $500 and $2,000 (before compound interest or other contributions) into a Registered Education Savings Plan for kids from low income families. Financial assets for education seem to make a difference to grades in secondary school and plans to go on to post-secondary. Today, there is more than $53 billion in Registered Education Savings Plan assets in Canada. But which kids have access to those assets? This Bond isn’t big but it’s education money, and earlier on, for kids growing up without many financial resources. That matters. So, are kids getting the money that we, collectively, owe them? Well, the metric the government uses most often is the share (now 34.7 per cent) of ever-eligible kids who have ever received the CLB since the program started. Things look a little rosier when we look at the share of eligible kids in a given year who are getting the CLB—since, thank goodness, kids don’t always stay in poverty year after year. As of 2016, about 41 per cent of kids eligible in a given year—and half of those who are eligible for the first time that year—got the CLB. By my estimate, in 2016 alone, about 770,000 low-income kids in Canada missed out on $126 Million in Learning Bonds. Take-up is rising a little, but there’s still a long way to go.”
Canada and China led the world in global borrowing
Jock Finlayson, executive vice president, Business Council of British Columbia (@jockfinlayson )
“At a time when Canada is struggling to hammer out a strategy for managing relations with China, it is good to know we have at least one thing in common with the Middle Kingdom: a seemingly relentless appetite for credit.
The chart, courtesy of my colleague David Williams, shows that China and Canada have outpaced all major economies in the build-up of debt. Since 2005, debt in Canada has jumped by more than 90 percentage points of GDP; in China, the increase is even greater, 115 percentage points of GDP. After a dozen years of frenzied borrowing, total debt now sits at roughly 360 per cent of GDP in Canada and 265 per cent of GDP in China. Most of Canada’s debt accumulation has been driven by households and non-financial corporations. In China, the broad private sector has also fuelled the debt bomb. As interest rates and the cost of credit move higher, heavily indebted Canada and China will both be battling some powerful economic headwinds.”
An indicator of slow growth ahead
Dominique Lapointe, economist, Laurentian Bank Securities (@Dlap17)
“In recent years, money aggregates have fallen out of fashion. Nonetheless, in essence, it still represents the currency liquidity in an economy. Leaving aside the debate whether money supply creates its own demand or vice versa, low interest rates are generally associated with money creation. Starting in mid-2017 when the Bank of Canada (BoC) embarked on a tightening cycle by raising its policy rate, measures of consumer and business credit demand slowed down. Unsurprisingly, we’ve also seen a major deceleration in the growth of money supply. It turns out that, post-financial crisis, the M2 money supply metric has been a fairly reliable leading indicator of GDP growth (see Chart). Assuming the relationship continues to hold, 2019 Canada could see some important deceleration in GDP growth. While pessimistic, this scenario is not inconsistent with the latest BoC’s base line forecast which assumes greater reliance on exports to fuel Canadian growth.”
Birds of a feather trade together
Aimeric Atsin, senior analyst, Institute of Fiscal Studies and Democracy (@AimericAtsin)
“The latest economic developments continue to demonstrate that Canada is a trading nation that is open for business. Indeed, Canada is the only G7 country that has trade agreements with all of the group’s members.
None of these trading relationships comes anywhere near the importance of that with the United States. And when it comes to leverage in trade deals, our ‘Canada goose’ is little match for the American ‘bald eagle’. But while once able to share the skies propelled by mutually advantageous trade winds, this relationship has recently hit some turbulence. As a result, our Canada goose looked to be on the verge of being cooked in 2019, with trade uncertainty weighing heavily on the minds of many. Despite this, from January to September 2018, the trade relationship between Canada and the U.S. remained solid, with $559 billion in total trade (exports plus imports) over this period. Large states such as Michigan, Illinois, Texas, and California made the most substantive contributions, with $69 billion, $55 billion, $42 billion, and $39 billion of the value of Canada’s total merchandise trade, respectively.
Now, with the United States-Mexico-Canada Agreement having taken flight, the skies have cleared, and the trade winds have returned. But, with the next presidential election only two short years away, it is hard to predict what rough weather may lay over the horizon.”
Canada is undergoing an investment crisis
Mike Newton, portfolio manager and director of wealth management, Scotia McLeod (@NewtonGroupSM)
“Walter Wriston once said that “Capital goes where it is welcome, and stays where it is well treated”. Unfortunately Canada is undergoing an investment crisis. Capital allocators simply don’t see us as a hospitable, competitive place to do business. At the moment I do not see a catalyst—but we may be forced into dramatic measures as we find ourselves with our backs against the wall. A non-partisan shift in cooperation at all levels of government and corporate enterprise will be required. Unless impactful moves, and new thinking is deployed, Canada will continue to suffer from reduced investment and entrepreneurship. Much like a like a large mall needs a successful anchor tenant, Canada is in the same position. If you will, we have the energy and materials on the one end (and we are well aware how tough that space is) and on the other end… well, I am not sure what we have? It would be nice to see a turn around in the trends in investment in intellectual property products.”
A way back needed for Alberta energy capital investment
Rob Roach, director of insight, economics and research, ATB Financial (@RobRoachCalgary)
“We hear a lot about the price of oil and, at least in Alberta, about the gap between what producers could be getting for a barrel of western Canadian crude versus what producers actually receive (the differential). Rising production, a frustrating lack of pipeline capacity and maintenance shutdowns at some key refineries worked together to push the price of Western Canadian Select oil to under US$15 a barrel while West Texas Intermediate was fetching over US$56 (as of November 14, 2018).
We hear less about another major problem facing Alberta’s and, by extension, Canada’s economy. Soft prices and the lack of progress on actually getting new pipes in the ground have seen capital investment in Alberta’s oil and gas sector plummet from $58 billion in 2014 to $23 billion in 2018. Even though that $58 billion was a record and investment was unlikely to stay that high, a 61 per cent drop in capital expenditures in the face of much stronger global oil prices and two years after the end of the provincial recession of 2015/16 is not normal. On top of this, the investment numbers are not likely to improve until the transportation bottleneck is resolved and oil producers have confidence in the future state of Canada’s oil industry. This a blow to the workers, businesses, investors (including Canadians saving for retirement) and governments that rely on the billions of dollars of investment that western Canada’s oil and gas sector can attract if it can just get its product to market.”
Watching and waiting for private investment to rebound
Pedro Antunes, chief economist, the Conference Board of Canada
“Over the past few years, private investment has been lagging—suggesting that investment levels barely exceeded the cost of wear and tear on the existing capital stock. We need to keep an eye on this data to see if investment levels recover enough to help us grow our means of production. The stock of real private capital is key to boosting future production, income and jobs in Canada.”
Is Canada poised for weaker growth?
Arlene Kish, IHS Markit Economics
“When it comes to Canada’s economy oil prices can be a blessing or a curse. Sharp oil price drops or shocks put a particularly stinging drag on the economy, often leading to recessions with impacts to both nominal and real measures. The oil market has been weak recently, but there are no specific signs of economic retreat yet. We look to the Bank of Canada’s Business Outlook Survey for clues as to where the weakness in the energy sector may be offset by gains elsewhere that should keep the economy afloat in the near term as the economy is expected to grow around two per cent over the next few years. The bottoming of the Western Canada Select oil price combined with the glut of oil supply, compounded with the lack of transmission pipelines make the perfect mix for holding off on investment in the industry, leading to recent calls for government intervention imposing production cutbacks of heavy crude, allowing prices to adjust upwards. Even the Alberta government is crying foul as its revenue base is very sensitive to changes in oil prices. The province will be hard-pressed to repeat the stellar 4.4 per cent leap in GDP in 2017 as long as oil prices remain depressed.”
Canadian companies have the highest debt service ratio in the world
Alexander MacDonald, investment analyst, Cowan Asset Management (@alex_macdonald )
“We’re #1! Canadian businesses piled on so much debt in recent years that their collective debt service ratio is now the highest in the world. This ratio—measuring the portion of income used for interest plus principal payments—increased noticeably following the oil price collapse in late 2014. With a barrel of Western Canadian Select oil now selling for roughly the same price as a Barrel of Monkeys, it’s unlikely that this ratio will decrease as we head into 2019. And with additional interest rate hikes on the horizon, the ratio could increase even more.”
The rise of the Millennial Generation and the Next Consumption Boom
Barry Schwartz, chief investment officer, Baskin Wealth Management (@BarrySchwartzBW)
“Millennials are persons born between 1981 and 1996, and there are a lot of them in North America. In Canada alone, there are more than seven million millennials. Millennials will soon be at peak employment, marriage, household formation, home buying and consumption age. Compared to the U.S., Canada will have the added benefit from a faster growing population. Over the past two years, Canada’s population has grown by more than one million people with immigration being the main source of growth. Many of the immigrants to Canada are in their prime working years.”
Will Canada decouple GDP growth from carbon emissions?
Jordan Brennan, economist, visiting scholar at Harvard Law, Unifor (@JordanPWBrennan)
“The Paris Climate Accord mandates a 30 per cent reduction in greenhouse gases from 2005 levels by 2030. The Liberal Government’s carbon tax plan will commence in 2019 and the hope is that it will decouple Canadian GDP growth from greenhouse gas emissions. This will be no mean feat. Over the 250-year history of the Industrial Age, economic growth has been fuelled by GHG’s.
Some societies have already decoupled growth from carbon emissions. Since 2005, the United States has managed to add 21 per cent to its GDP while shrinking carbon emissions by 13 per cent. A variety of technological and policy factors appear to be at play, including vehicle emissions standards, a reduced reliance on coal-powered electricity, the shale revolution and the explosion of renewable energies like wind and solar. The European Union has also severed growth from emissions, having increased its GDP by 16 per cent since 2005 while lowering its carbon footprint by 11 percent.
Canada has become more efficient with the use of carbon, to be sure, having added just three percent to its emissions while adding 23 per cent to its GDP, but it has still not severed the link between the two. The developing world, China included, is still heavily reliant on GHG pollution to power economic development. The race is on to decouple emissions from growth and it will be interesting to see if Canadian climate policy achieves its intended effect.”
A tariff-ying escalation
Stephen Tapp, deputy chief economist, Export Development Canada (@stephen_tapp )
“2018 was an eventful year for global trade policy. The United States made headlines and shook financial markets by imposing tariffs on a wide range of imported products, as the Trump administration tried to rebalance its relationships with key trading partners.
American tariffs started modestly in January with actions in smaller sectors, like washing machines and solar panels. Things ratcheted up in March with tariffs on steel and aluminum, which is having a greater economic impact, and eventually hit traditional military allies in Canada and the European Union, who countered with tariffs of their own.
The scale of those initial U.S. actions effectively doubled in July, but the biggest escalation came in September, when the U.S. ramped up its trade dispute with China through a second round of tariffs.
Currently, about 13 per cent of U.S. imports are subject to tariffs. In the year ahead, there may well be more drama. President Trump had threatened to hit the rest of Chinese imports to the U.S. (Round 3?)—though he and China’s Xi Jinping agreed to a 90-day truce on Dec. 1—and there may still be action on auto tariffs, as the U.S. looks for leverage as bilateral talks get underway with significant car producers in the European Union and Japan. Taken together, the threats are larger than the actions taken to date. Let’s hope cooler heads prevail.”
Export commodity prices and exchange rates
Allan Gregory and Gregor Smith, professors of economics, Queen’s University (@awg_allan)
“For Canada, Australia, New Zealand, and Norway, the graph shows an export commodity price index in U.S. dollars (in red, on the left scale) divided by the U.S. CPI, and the value of the local currency in U.S. dollars (in blue, on the right scale) for each month since 2000.
Good news: We know something about nominal exchange rates. Each country’s exchange rate is highly correlated with its commodity export prices, which are determined in the rest of the world. The correlation is equally obvious for petro-currencies (CAD, NOK) the ferro-currency (AUD), and the lacto-currency (NZD). Finding this strong pattern for all four economies suggests we don’t have a false positive correlation that is just a coincidence or the result of searching over many series.
Bad news: Commodity-price changes generally are no more predictable than exchange-rate changes, so knowing this correlation doesn’t help us foretell the future, though it does help us explain our exchange-rate history. Studying both statistical and machine-learning methods shows you can’t beat the random walk model. That means increases and decreases are equally likely so that the current value is the best predictor at all future horizons.
The exchange rate is an important price, so you might come across forecasts for the 2019 change in the value of the Canadian dollar (or these other, widely traded currencies). You can safely ignore those.”
Spend now, save later
Erik Hertzberg, financial journalist, Bloomberg (@ErikHertzberg)
“The savings rate in Canada hasn’t been this paltry in more than a decade — a sign consumption driven growth is nearing an end.
According to Statistics Canada, the proportion of disposable income that remains after spending fell to 0.8 percent in the third quarter, the lowest level since early 2017. It’s averaged 1.4 percent over the past year, the worst on an annual basis since 2005.
That suggests Canadians are increasingly putting off saving to maintain their spending, and the subsequent impact on wealth effects may already be cooling some parts of household consumption. Expenditures on goods in the last two quarters were up just 1.5 percent from a year earlier, the weakest growth since 2012.
The Canada-U.S. relationship won’t mend easily
Laura Dawson and and Jackie Orr, Canada Institute at the Wilson Center. Twitter: @
“For most organizations, the jump in revenue in the chart above from June to July might be considered “impressive.” From January to June of 2018, Canada collected on average $45 million from duties on imported U.S. goods. That revenue from U.S. duties rose to $173 million in July and reached $198 million in August. In the U.S., the picture is even more “impressive.” From January to June of 2018, their average monthly revenue on imported Canadian goods was $25 million rising to $237 million in both June and July, and $239 million in August.
But for Canada, this doesn’t represent an impressive jump in revenue: instead, it’s an unfortunate dive into the beginning of a trade war with a neighbour and long-time friend. It’s a break of confidence and one that will linger regardless of whether the U.S. and Canadian tariffs stick around or not.”
Watch for higher delinquency rates and credit losses at Canadian banks
Anthony Scilipoti, CEO, Veritas Investment Research
“Many prognosticators have commented about Canadian’s debt levels. In fact, the level of household indebtedness carried by Canadians has drastically increased over the last 10 years rising from $1.3 trillion in 2008 to $2.1 trillion in 2018; a 62 per cent increase. The rise in household credit has been fuelled by both mortgage and non-mortgage credit; the former increasing by $570 billion and the latter increasing by $219 billion since 2008. Yet, much to the surprise of many, increasing leverage has not had any meaningfully negative impact on the Canadian economy.
We believe risk is not solely a function of the absolute level of leverage. Rather, the key lies in an individual’s ability to service his or her debt. As shown in the chart, during the past 10 years, the debt service ratios (‘DSR’) have stayed virtually flat at approximately 14 per cent. The DSR measures total principal and interest payments relative to disposable income. The chart also shows that the interest component, thanks to the Bank of Canada’s (BOC’s) sharp interest rate cuts, has fallen by roughly a third from a peak of 9.1 per . cent in 2007 to 6.3 per cent in 2017.
In other words, since the financial crisis, Canadians have increased their indebtedness by over 50 per cent. Yet as a proportion of disposable income, the costs to carry said debt has remained constant.
Unfortunately, the regime of low interest rates is about to change. According to the BOC, the weekly effective interest rate for households, which is a weighted-average of mortgage and non-mortgage interest rates, reached 3.9 per cent in October 2018; the highest rate since March 2009. As higher rates flow through to outstanding retail credit, primarily from rate resets on fixed and variable rate mortgages, Canadian households are expected to experience rising DSRs for the first time since the financial crisis.
The BOC’s June 2018 Financial System Review analysis of the impact of higher rates from fixed mortgages renewals implies that the household DSR is expected to rise to around 14.9 per cent, matching the peak DSR reached in 2007. The rising DSR will put pressure on consumer spending, and based on our analysis, is a reliable leading indicator of higher delinquency rates and credit losses for Canadian banks. With the DSR already at 14.5 per cent in Q2-18, we caution investors that higher retail credit risk is around the corner and that investors should closely monitor their exposure to banks dependent on Canadian retail lending.”
Lower Canadian oil prices will ripple across the country
Peter Tertzakian, executive director, ARC Energy Research Institute (@ptertzakian)
“World oil prices have their ups and downs. But not all oil is the same, which is why different grades—like different coffee beans—trade at different prices. For oil, quality is differentiated on whether barrels are “light” or “heavy.” The latter usually trades at a discount due, because it needs more refining to make the petroleum products we use every day. Geography also matters. Further distance to market can affect price.
Because oil is a worldwide commodity with intricate supply chains, global prices track each other’s movement very closely depending upon quality and transportation “differentials.” Or depending upon regional factors, like too much local supply for the take-away infrastructure. Which is the case right now in Canada.
The chart shows the movement of a sample of global grades. Dominant benchmarks on trading floors include Brent (North Sea); Arab Light; Maya (Mexico); WTI (USA). Then there are the Canadian grades: Edmonton Light and Western Canada Select, or WCS.
The top line decline in global oil prices is manageable. The precipitous decline in Canadian prices, due to surplus production and constrained pipeline capacity, is not. Absolute prices for WCS, which affects the oil sands is barely US$15/barrel. More devastating is the fall in the premium Edmonton Light, which is barely above US$30/barrel. Both place much of the industry in a negative cash flow position, which speaks to imminent job losses if the situation is not remedied soon.
Under normal Canadian price differentials, the oil and gas industry should be generating over $100 billion in annual revenue in 2019. Discounts are expected to narrow into 2019, but not to normal. The top line forfeiture could easily exceed $15 billion, with obvious negative implications to employment and negative multiplier effects that ripple across the country. The numbers dwarf other segments of the Canadian economy. That’s why pipelines and rail cars matter.”
Bigger U.S. fiscal deficits = bigger U.S. trade deficits = angry Trump
Michael Veall, professor, Department of Economics, McMaster University
“U.S. trade tension with other countries, including Canada, will likely continue as President Trump apparently puts great weight on the U.S. overall trade deficit. But an increasing U.S. federal budget deficit, which is much larger per capita than Canada’s, makes it very likely that the U.S. trade deficit will also increase. When the government consumes more than its revenues that increases the amount the country as a whole is consuming in excess of what it produces. That gap can only be filled by imports exceeding exports—that is, a trade deficit.”
Long-term incentives needed to boost investment
Helmut Pastrick, chief economist, Central 1 Credit Union
“The federal government introduced several measures to increase business investment spending in Canada in response to U.S. tax changes such as its temporary Bonus Depreciation. The government’s Fall Economic Statement responded to this relative disadvantage by allowing Canadian businesses to write off a larger share of the cost of newly acquired assets in the year an investment is made. Assets include not only machinery and equipment but also intellectual property products such as patents, software, research and development and other intangibles.
Interestingly, the government was prompted by U.S. actions rather than the lacklustre performance of investment spending since 2008 in Canada.
Will businesses step up investment spending as a result of these measures? On the surface, yes, but how quickly will depend on individual circumstances such as market conditions, financing costs, and profitability prospects. Some businesses may operate in weak markets and see no need to expand productive capacity. Others may want to upgrade their production process to reduce costs and some will increase spending because it is financially attractive.
A broadly-based material uplift in investment spending will likely take some time given current and expected macroeconomic conditions. Unwisely, these measures will be gradually phased out starting in 2024, and no longer in effect for investments put in use after 2027. Canada’s economy needs such incentives over the longer term to improve its productivity and performance.”
More immigrants needed in Atlantic Canada
Patrick Brannon, director of major projects, Atlantic Provinces Economic Council (@APECatlantic)
“Canada’s population increased by 1.2 per cent in 2018, the largest increase since the early 1990’s. The main driving force was increased immigration. The federal government announced its new immigration targets in October which will see the flow of new Canadians increase from about 310,000 this year to 350,000 by 2021. The unemployment rate in Canada is at its lowest level since the early 1970’s and labour shortages are intensifying. Immigration will be key to filling many new jobs in the country as millions of baby boomers retire over the next decade.
In Atlantic Canada, the population is older than in the rest of Canada and unemployment (8.6 per cent in October) is at its lowest level since the late 1960’s. Immigration is playing an increasingly important role in offsetting some of the decline in the labour force—which fell by 47,000 over the last four years. Immigration to Atlantic Canada has not been keeping pace with flows to other parts of Canada. The gap has closed recently, but more needs to be done to stabilize the labour force in the region. Programs like the Atlantic Immigration Pilot must continue and in fact accelerate to support the labour force challenges ahead for Atlantic Canada.”
The gig economy is now a key source of income for one-in-seven Canadians
Danielle Goldfarb, head of global research, RIWI Corp. (@DIGoldfarb)
“How important is online-facilitated work—such as working as an Uber driver, selling crafts on Etsy, or selling website design services to clients globally—to our livelihoods? Common wisdom has is that this type of ‘gig economy’ work is marginal or supplemental to traditional jobs. This chart says otherwise: such work is now a key income source for one in seven Canadians.
These data are a starting point to better understand and capture the digital economic activities that are present all around us but mostly unreflected in existing measures. This chart provides some hard evidence—and a baseline measure—of the significance of work made possible by the global digital economy. (Conventional job surveys that ask only whether a person is employed wouldn’t capture someone who earns all or some of their livelihood via Airbnb rentals, for example.) In 2019 and beyond, it will be critical for policymakers and economy-watchers to understand how Canadians feel about such work and what it means for our livelihoods and well-being.”
A bust to inevitably follow the boom
Hilliard MacBeth, author, When The Bubble Bursts: Surviving the Canadian Real Estate Crash (@hmacbe)
“For 2019 watch growth in Residential Mortgage Credit. This key metric grew at 10 percent or higher for several years between 2005 and 2010, leading to Canada’s unprecedented housing bubble. When annual change in mortgage credit turns negative, a couple of things will follow, without much delay. First, house prices will decline sharply as happened in the 1980s, as new borrowing is the oxygen that gives life to housing bubbles. Second, a recession becomes inevitable, as credit expansion faster than GDP growth is needed to avoid a recession. There hasn’t been a serious economic downturn in Canada since the 1990s; the last time that mortgage credit grew as slowly as now. Unfortunately bank lending is pro-cyclical, so lenders will tighten credit conditions just as real estate borrowing stops growing, which will make the downturn worse. This boom/bust cycle is inevitable as long as lenders focus on lending for real estate investment and speculation rather than more productive investments. To change that focus, a new set of rules and regulations that govern lending is needed.”
Risk of recession rising
Larry MacDonald, economist, MacDonald Consultants (@Larry_MacDonald)
“Past expansions in U.S. and Canadian economies usually ended when full employment and capacity constraints produced inflationary pressures that caused the Federal Reserve to raise interest rates to high levels. The current economic cycle could be getting close to this scenario again. As shown in the chart above, the U.S. core Personal Consumption Expenditures price index has now trended up to the Fed’s target of two per cent; if inflation continues to climb, the Fed could keep hiking interest rates until a slowdown emerges in the economy.”
Vacancy rates and rents in cities across Canada
“With a renewed focus on renters and public discussions about rent control, this graph highlights the relationship of the vacancy rate to inflation-adjusted fixed-sample rent changes in market purpose-built rental units. Fixed sample means that it follows the same units for year-over-year rent change. It implicitly controls for composition, but might miss renovations. It’s the Case-Shiller index for rents. The graphs validate the rule of thumb of a three per cent vacancy rate as being considered as healthy. When the vacancy rate climbs above three per cent, inflation-adjusted rents generally flatten and go negative. When the vacancy rate drops below three per cent, inflation-adjusted rents tends to climb. Even with our course temporal resolution we find that vacancy rates tend to lead rent changes when correlated, which suggests a causal relationship. The CMAs shown are the 12 CMAs with the highest total number of purpose-built market rental units in Canada. They are ordered by the share of rental households in purpose-built rental units, ranging from 83 per cent and 75 per cent in Sherbrooke and Montreal to 32 per cent and 30 per cent in Vancouver and Calgary. The natural vacancy rate, the rate when inflation-adjusted rent stays flat, varies somewhat across cities and possibly across time. Vancouver appears to have a lower natural vacancy rate, with inflation-adjusted rent dipping in the negative while the vacancy rate maxes out at 2.7 per cent. On the other hand, Sherbrooke, Montréal and Halifax appear to have slightly higher natural vacancy rates.”
Is British Columbia in for another summer of smoke?
Joel Wood, assistant professor, Department of Economics, Thompson Rivers University. (@JoelWWood)
“The 2017 and 2018 forest fire seasons set records in British Columbia for total hectares of forest burned. The fires cause lost timber values, property damage, and temporary population dislocations. The Government of B.C. is still tallying up the direct costs of the fires for 2018, but for 2017, they estimated the costs as $568 million. In addition, the ultrafine particulate matter (PM2.5) resulting from the forest fires also has an impact on human health and possibly on economic sectors, such as tourism. In the summer months, millions of people travel from across Canada and around the world to experience B.C.’s outdoor beauty and recreational opportunities; the smoke from the fires certainly affects the quality of these experiences. Hopefully, the 2017 and 2018 wild fire seasons are not the new normal in B.C.”
Kevin Carmichael, national business columnist, Financial Post (@carmichaelkevin )
“Canada’s economy is changing: fast. The jobs are in services and the wealth is being generated by intangibles such as patents and software. The Bank of Canada likes to use the sub-industry that Statistics Canada calls “computer assisted design and related services” as a proxy for the “creative” side of “creative destruction.” As Stephen Poloz, the governor, informed an audience in Moncton, New Brunswick in September, that group of companies already is responsible for more economic output than automobiles and aerospace combined.”
The oil price collapse could put a lid on rate hikes
Doug Porter, chief economist, BMO Financial Group
“Are interest rates really going to go much higher in 2019? The deep drop in Canadian oil prices in late 2018 raises some serious doubts on that front. This chart looks at a broad index of Canadian energy prices — oil production that receives WCS prices, WTI, even some at Brent, as well as natural gas prices — and then coverts it all into Canadian dollar terms. Over time, this has worked as an excellent indicator of where interest rates are headed, specifically long-term bond yields. The conventional wisdom is that the Bank of Canada will boost interest rates between two and four more times in 2019, putting upward pressure on a broad array of borrowing costs. The relationship in this chart suggests that isn’t going to happen, unless oil prices mount at least a partial recovery.”
Canada under pressure to ramp up climate ambitions in 2019
Hadrian Mertins-Kirkwood, researcher, Canadian Centre for Policy Alternatives, (@hadrianmk)
“If the whole world were to adopt Canada’s flagship greenhouse gas emissions target—of a 30 per cent reduction below 2005 levels by 2030—the globe would be on track for a temperature increase of more than 5ºC by 2100. And that assumes policies will be put in place to reach the target. Currently, Canada’s climate policies—including the federal government’s controversial carbon pricing system—aren’t strong enough to achieve even our inadequate emission reduction goals.
Canada’s weak climate targets will be in the spotlight in 2019 as the international community undertakes a review of recent efforts to combat climate change. Will Canada rise to the challenge and update its emissions targets, which were mostly established under the Harper government? Or will we continue to drag the world toward an unlivable planet?
As a recent, high-profile IPCC report made clear, a temperature increase above 1.5ºC will be highly destructive and dangerous for humanity, but it is survivable. Warming in the range of 3-5ºC, on the other hand, poses an existential threat to our civilization. There is no more important issue for our economy.”
Quebec, not Alberta, is driving private sector job growth
Ted Mallett, chief economist, Canadian Federation of Independent Business (@cfibeconomics)
“Canada’s private sector job vacancy rate is setting new highs, passing the marks set before the 2008 financial crisis. This time, though, the pace is being led by Quebec rather than Alberta. Vacancy rates are also above the national average in British Columbia and Ontario. Business response to these trends in 2019 will likely accelerate the pace of capital substitution, occupation mix and wage redistribution.”
Earnings and employment 10 years after the last peak
Jamie Carson, recovering economist and part-time data wonk for the PNG team in Ottawa, (@carsjam33)
“2019 will be an election year with jobs and stagnant wages both being at the top of voter’s minds. Ten years after the global financial crisis, the Bank of Canada is on a tightening cycle, labour demand is viewed as being strong, while wage growth is charitably described as being moderate.
To gain perspective on where we are and where things might be headed, we break out earnings and employment by sector. To show earnings and employment on the same chart, we use a scatter plot with earnings on the y-axis and employment on the x-axis. Data are shown for the average of the 12 most recent months, along with the equivalent period from ten years ago. Employment peaked in May/June of 2008, so we’re essentially looking at peak to ‘wherever in the cycle we are now’.
Looking at the chart, you can immediately see that oil and gas extraction (excluding related support services) has relatively low employment, but very high weekly earnings. In contrast, the retail sector has nearly two million employees, but relatively low wages. After a series of booms and busts, oil and gas employment has ended up roughly the same as it was in 2008, although wages have grown strongly. The health care sector, on the other hand, has seen robust employment growth, but only moderate wage growth. The manufacturing sector is the only sector shown that saw employment decline over the past 10 years.
This chart will be worth watching in 2019 to see what areas see a spike in wage growth if the good times continue and the labour market continues to tighten. Will wage gains be widespread, or limited to a few hot sectors? Professional, Scientific and Technical Services will be one area, in particular, to watch as we attempt to transition to a more innovative, high-tech and diversified economy.
The chart will also be worth watching if a downturn takes hold, particularly in construction where over one million Canadians are employed, and in manufacturing which is highly sensitive to international trade. (One caveat to this is that industries are not occupations, and some workers are better able to transfer their skills to different industries than others.) Note that the chart only shows selected sectors and industries for clarity. The data are unadjusted for seasonality, so 12-month averages of data up to and including September 2018 (and 2008) are used for smoothing. For this visualization, earnings data have not been adjusted for inflation, but this and other alternative views can be made available on request.”
Wealthier and older
“Canadians are living longer—but is everyone benefiting? In recent research, we put people in 100 percentile bins based on their earnings from age 45 to 49, ranked from lowest to highest. We then estimate life expectancy after age 50 by year of birth and graph the results for each earnings percentile. The graph shows that high-earning men live eight years longer than low-earning men, but gains in longevity have been similar across earnings groups. For women, the difference between low and high earners is smaller, but gains appear across earnings groups as well.”
Companies will continue to steal rather than train employees
Linda Nazareth, economist and author of Work Is Not a Place: Our Lives and Our Organizations in the Post-Jobs Economy (@relentlesseco)
“It’s a very North American phenomenon: companies like to steal employees rather than train them themselves. And, if you believe what this graph of ‘job vacancies to job seekers’ is saying, that trend is going to intensify in 2019.
As of mid-2018 there were just over three job seekers for every opening out there which is not as high as it sounds. For one thing, the vast majority of job openings are likely not caught by the official figures. More important though, most of those openings probably cannot be filled by someone who is officially unemployed anyway. That is, the person to fill a high level, specialized tech job is probably someone who already has a high-level specialized tech job at another company, not someone who is out of work. They may stay where they are, or they may be willing to jump ship if the money is good enough, and for the right people it might be in 2019.
It is a good thing actually that companies are willing to pay for top talent (particularly if you are that talent). More broadly though it might be healthy to ask what we can do to train a labour force that meets the needs of economy. That might mean there is a role for governments, but it also means that business should give some thought to developing the workforce they want before the poaching game gets out of hand.”
Weak export volumes will cap interest rate hikes
Avery Shenfeld, chief economist, CIBC Capital Market
“As the Bank of Canada raises interest rates, it’s hoping that a slowdown in housing and debt-financed consumer spending will be offset by better results on exports and related capital spending. That view is predicated on the idea that uncertainties over NAFTA have previously held Canada back. But Canada has been badly underperforming in export volume growth (i.e. exports after deducting inflation) all the way back to 2000, relative to both global trade and U.S. exports. The U.S. central bank is also trying to cool American demand with its own interest rate hikes, and that’s our largest export market. Too many factories closed in Canada over the past decades, and not enough businesses have chosen Canada as a base to serve foreign markets for goods or services. That suggests that we will avoid taking Canadian interest rates much higher in order to both keep the Canadian dollar at levels that make our exports competitive, and to prevent too sharp a retreat in interest sensitive demand in Canada until export capacity additions start to show up.”
Falling oil prices will force the Bank of Canada to pause
Martin Pelletier, portfolio manager, TriVest Wealth Counsel Ltd (@MPelletierCIO)
“The Bank of Canada has been overly hawkish with its interest rate outlook, even going so far as using the term “solid momentum” to describe the Canadian economy. That said, we think it is missing something rather important, as a significant portion of the growth witnessed over the past three years has come from a recovery in the energy sector and the Alberta economy. And yet here we are again with a situation that is even worse than the first correction and for some reason it barely makes a footnote by both the Bank and the Federal government.
However, the estimated cost to the Canadian economy from our oil price discount to global pricing is about $80 million per day, which we think will eventually be too large an issue to ignore and therefore a catalyst for the Bank to pause on its interest rate policy heading into 2019.”
U.S. protectionism will pose a global threat
“U.S. protectionism will remain one of the main threats to the global economy in 2019: President Trump, a self-described ‘tariff person’, is set to be frustrated by record-setting U.S. trade deficits as a relatively strong U.S. dollar and his own tax cuts and spending increases boost U.S. demand for foreign goods.
The Trump Administration’s hard-ball efforts to renegotiate NAFTA and to impose specious ‘national security’ tariffs on imports of steel, aluminium, and possibly autos from U.S. allies have led many analysts to say that President Trump’s trade bite is indeed as bad as his bark.
The real test of President Trump’s mettle as a tariff enthusiast, however, rests in his trade spat with China. In June 2018, President Trump ordered 25 per cent duties on about US$50 billion of goods from China. In September 2018, the White House slapped a 10 per cent tariff on an additional US$200 billion of U.S.-China trade and vowed to increase these duties to 25 per cent on January 1, 2019. Yet, following the G20 Summit on December 1, President Trump announced that he would hold off on this planned tariff increase for 90 days of negotiations with Beijing. White Advisor Larry Kudlow subsequently confused matters by adding another 30 days to the tariff truce, but this was later walked back.
These delays shouldn’t come as a huge surprise: President Trump knows that consumer goods make up about 23 per cent of this second tranche of annual U.S. goods imports from China; a move to intensify duties on these imports would be hard on U.S. households. He’s previously threatened to hit the remaining US$267 billion of annual goods imports from China with further duties of 10 to 25 per cent. Some 36 per cent of this last tranche is consumer goods, including smart phones and tablets.
Tariffs on the full suite of U.S. imports from China would shave 0.2 percentage points (ppts) off U.S. growth; retaliatory trade barriers from other countries and chilling effects on business and consumer confidence could reduce U.S. growth by another 0.5 ppts.
We’re doubtful President Trump is enough of a ‘tariff person’ to hit his base in its pocketbooks and slash U.S. growth heading into his re-election campaign in 2020.”
Fiscal policy at the subnational government level is not sustainable
Ian Lee, associate professor, Carleton University’s Sprott School of Business
“In its Fiscal Sustainability Report 2018, from which this chart is taken, the Office of the Parliamentary Budget Officer states, “for the subnational government sector as a whole, current fiscal policy is not sustainable over the longer term.”. They explain this dire conclusion by noting, “rising healthcare costs due to population ageing drive the deterioration in subnational government finances over the long run.”
Every elected official—federal, provincial and municipal—as well as the education sector and NGOs should study this report very carefully indeed, as it is a harbinger of our future. The data and PBO extrapolation strongly suggests that future spending initiatives such as a national pharmacare program or universal free tuition for higher education, or new universities, are increasingly unlikely. Indeed, it suggests substantial program restructuring, expenditure reductions and even provincial bailouts for our most financially distressed provinces such as Newfoundland and Labrador and New Brunswick, will in in our future.”
Interest rates to keep moving higher
Derek Holt, vice president, head, Scotiabank Capital Markets Economics
“Neither the Bank of Canada nor the Federal Reserve is on the verge of driving their respective economies into recession through rate hikes. The chart shows the inflation-adjusted policy interest rate in Canada and the U.S. over time with shaded vertical bars representing recession periods. The so-called ‘real’ rate is either about zero (U.S.) or about -0.5 per cent (Canada). Never before has either country entered recession driven by over-tightening of monetary policy with the real policy rate as low as it is today. As such, monetary policy remains stimulative to growth in both countries. Against guidance that 2019 will lead to interest rate relief for borrowers on such recession fears, it would be prudent and responsible for borrowers to prepare for further rate hikes within economies that have essentially exhausted slack and that are generating firm inflation pressures.”
Canada is now the second largest foreign investor in the U.S.
Paul Boothe, managing director, Trillium Network for Advanced Manufacturing (@pmboothe)
“Canada’s foreign direct investment (FDI) in the U.S. doubled between 2012 and 2017, easily outpacing the U.K., the largest foreign investor (in cumulative terms) in the U.S., as well as other large countries. By 2017, Canada was the second largest foreign investor in the U.S. ahead of both Japan and Germany. This occurred at a time when the Canadian dollar was falling against the U.S. dollar, making it more expensive for Canadian firms to invest in the U.S. Canada’s rising stake in the U.S. is consistent with the growth of foreign, especially U.S., sales by Canadian affiliates which now exceed the value of Canadian exports. Canadian FDI has been spread across U.S. industrial sectors—manufacturing, finance and insurance, real estate, mining and utilities. The fact that Canadian firms are steadily increasing their production footprint in other countries rather than at home calls for a sharpened assessment of Canada’s competitiveness in creating jobs and income.”
Male teachers are vanishing from classrooms
Frances Woolley, professor of economics, Carleton University (@franceswoolley)
“The representation of men in the teaching profession is slowly, inexorably, declining. Men now account for one in four primary and secondary school educators. Moreover, male teachers tend to be closer to retirement age than female ones. The next generation of teachers, as represented by those in the 30 to 34 age group, is 21 percent male. Hence the downward trend in male teaching numbers can be expected to continue for some time to come.
The lack of male teachers may have a negative impact on students, especially boys, who lag behind girls in most measures of educational achievement. Indeed, an influential 2007 study by Stanford education economist Thomas Dee found that both boys and girls performed better when assigned to a teacher of the same sex. However other, more recent, studies have found little relationship between teacher gender and educational outcomes.
Indeed, I suspect that most parents are more concerned with the quality of their child’s schooling than the sex of their child’s teacher. Recent US research suggests that concern is well-founded. Teacher quality has long-run effects on children’s achievement. Poor quality schooling appears to have a particularly negative impact on boys, widening the gender attainment gap.
Yet the importance of quality gives another reason to be concerned about the relative absence of male teachers. If any group – be it males, or visible minority Canadians, or immigrants – is discouraged from entering teaching, we risk excluding high quality educators from the profession.” With Ryan Daher
Outright mortgage credit contraction would trigger a recession
“Real mortgage credit is a leading indicator in the business cycle. Large expansions accompany booming economies. Quick drops are typically followed by recessions. Then there’s a rare event we’ve only seen once before in Canada—a mortgage credit contraction.
Mortgage credit contractions lead to a “credit crunch.” This is when banks slow lending, and defaults rise dramatically. The rise in defaults leads to even more tightening. The tighter the lending, the more severe the recession.
Canada’s real residential mortgage credit growth has only been this low twice before. The annual pace of growth was 1.14 per cent in September, down 70.8 per cent from last year. It was last this low once in 2001, and once in the early 1980s. In 2001, it was only this low for four months, before interest rates were slashed to bring it higher. However, a cut is not on the table today.
The Bank of Canada is currently on the path to rate normalization. This means they plan on raising interest rates by roughly 42 per cent. The rise would drop mortgage credit into the red for the first time in over 30 years. A contraction would result in a once-in-a-generation recession.”
Will the rate of income poverty continue to fall?
Miles Corak, professor of economics with the Stone Center on Socio-Economic Inequality at The Graduate Center, City University of New York (@MilesCorak)
“On November 6, the Minister of Families, Children and Social Development, Jean-Yves Duclos, tabled Bill C-87 for first reading in the House of Commons. The Bill is called “An Act respecting the reduction of poverty” and it, or a version of it, will more than likely be enacted into law sometime in the spring.
This legislation makes the poverty rate a statistic to watch over the coming months and years. The federal government is proposing two things that are designed to not only keep its efforts at poverty reduction in the spotlight, but also keep the toes of provincial and future federal governments to the fire.
First, an official definition of poverty is established, and second, explicit targets are set for reducing the poverty rate progressively to less than one-in-ten Canadians by 2020 and to less than about one-in-seventeen by 2030.
The poverty rate is released by Statistics Canada with a considerable lag, and the figures for 2017 will be made public early in the New Year. They will likely show that the federal government will, ironically, hit its 2020 target before the legislation establishing it is enacted into law. This will mark the first time in the history of this statistic that less than 10 per cent of Canadians are income poor.
Reaching the 2030 target will prove harder, even if it is more than a decade into the future, but each year it will establish the poverty rate as a statistic to gauge how sincerely policy-makers speak to the needs of the less advantaged.”
A ceasefire between Trump and Xi won’t save the Chinese economy—or Canada
Karl Schamotta, director of global product and market strategy, Cambridge Global Payments (@vsualst)
“Chinese policymakers have been playing whack-a-mole with imbalances in the financial system for several years now, and money supply growth (a proxy for credit) has reached historic lows—triggering a broader contraction that is impacting Canada through trade, commodity, real estate, and investment channels.
As trade pressures have risen and the economic pain has reached politically-unpalatable levels, leaders have taken steps to reverse direction—easing monetary policy, expanding fiscal stimulus, and allowing the currency to depreciate. This should stem the bleeding, but serious questions are being raised around China’s commitment to reducing the sort of vulnerabilities that could trigger an economic collapse in the future.
Debt in Canada’s private non-financial sector has topped 168 per cent of GDP, and the country runs a current account deficit—meaning that it is reliant on foreigners to plug an external financing gap. As such, in a perverse irony, the country’s small, open economy could suffer if a cessation in trade war hostilities, like the early December truce between President Trump China’s Xi Jinping, emboldens a renewed crackdown on credit growth in China.
Be careful what you wish for – you just might get it.”
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