5 Things to Know about Canada's Economy

5 Things to Know about Canada’s Economy
From the World Economic Forum

The sweeping election victory of Justin Trudeau’s Liberal Party has thrust Canada’s economic woes into the global spotlight.

The commodity-based economy is technically in a recession, owing in part to this year’s fall in oil prices. But the country is also suffering from deeper structural problems. Addressing these challenges and building an economy for the 21st century are among the key challenges facing Canada’s new prime minister.

Reliance on crude oil
Canada’s economy, ranked 11th in the world by GDP, has focused on resource extraction in recent years. While crude oil, Canada’s big commodity export, helped the country get through the global financial crisis relatively unscathed, the low oil price is now putting the economy under severe strain. This year, Canada’s economic performance has been the worst among a small group of developed economies that depend heavily on resources, such as Norway and Australia. Between June 2014 and July 2015, revenue from Canadian energy exports decreased 34.6%, forcing producers to cut back on jobs and investments.


Structural problems

The drop in global energy prices is not the only reason for Canada’s sluggish economy. There is much hand-wringing over Canada’s lack of innovative, globally competitive companies at a time when its traditional manufacturing industries are being eroded. Canada trails other developed economies in areas including corporate research and development, information technology investments, patents and productivity.

Debt and overvalued housing
There are concerns that ultra-low interest rates, currently at 0.5%, have been driving unsustainable housing booms, particularly in Toronto and Vancouver. Consumer debt is at a record 165% of disposable income, with most of the borrowing going into buying houses. Bank of Canada Governor Stephen Poloz said that increasing levels of household debt represent “a key vulnerability for the financial system”.



Budget deficits and spending
Canada’s recession made stimulating economic growth a key topic in the election. Conservative leader Stephen Harper, who stepped down after almost a decade in power, pledged to run a balanced budget. In contrast, Trudeau said he would tackle the economic downturn by running budget deficits of $25 billion over the next three years to fund infrastructure. The incoming prime minister has also pledged to cut income taxes for middle-class Canadians while increasing them for the wealthy.

The Keystone oil pipeline
Mr. Trudeau plans to address environmental concerns over proposals for the controversial Keystone oil pipeline, which has put relations between the US and Canada under strain. Mr. Harper had hoped the pipeline, which would carry crude from Alberta to Texas, would create jobs, but President Obama rejected the plan late last week. Essentially, the President was doing Hillary Clinton a favor in her run for the White House, but inadvertently did Mr. Trudeau a favor as well.









The USD was the undisputed winner on the week, easily outpacing its nearest competitor by a margin of 1.31%. The USD surged higher on the back of a very strong labor report that smashed expectations. The U.S. economy created 271K jobs for the month of October, which was the strongest monthly increase in payrolls this year. The unemployment rate also dropped to 5%, the lowest level since 2008. And for good measure, average hourly earnings rose 0.4%, which was the largest increase since July 2009. These strong numbers allowed the market to recalibrate the odds of December interest rate hike by the Fed from 56% to 72%. Meanwhile, the worst performing currency was the NZD after the latest Global Dairy Trade auction revealed that prices fell by 7.4%, the biggest drop in 3 months.

The Bank of England’s second Super Thursday triggered a selloff of 2.44% in sterling last week, its worst performance in eight months. Super Thursday occurs when the BOE releases its latest policy decision, the minutes of their deliberations and their quarterly forecasts for growth and inflation. The BOE left rates unchanged at 0.5% as expected with an 8-1 vote. However, it was the bank’s Quarterly Inflation Report that really tarnished sterling. The bank slashed inflation targets and GDP growth for 2016 to 1% and 2.5% respectively due to its concerns about global growth and the impact of commodity prices on inflation. Adding to the dovish tone, the central bank said that asset purchases (QE) would only be unwound when the key rate reaches 2%. Even though BoE Governor Mark Carney said in the press conference that it is “reasonably prudent to think BoE rates will rise in 2016”, the market pushed out the timing of its first interest rate hike due to the dovish Quarterly report. Thus, the BOE is still expected to be the second major central bank to hike rates after the Federal Reserve, however, the gap between the Fed's move and the BOE's move has widened causing the GBP to selloff.

Last week’s price action saw the pound hold support above the 1.50 level. If supports breaks that would open up a decline to the next support level just about the 1.48 level. Furthermore, the weekly close of the pound has bearish implications as it recorded an outside down week. Unfortunately, the pound could face more pressure this coming week as Premier David Cameron writes a letter to the EU setting out the UK’s conditions to remain in the EU, or said in a negative way, Britain’s EU exit warning.