March 26, 2014


Canadian economy shows surprising strengths

High household debt masks positive underlying fundamentals


For the past several years this column has been highlighting important trends that signal frothiness in Canada’s housing sector. These range from long term price increases, to a break from market patterns in other advanced economies and rising consumer debt. However recent economic data have been showing positive underlying strength.


For example Canadian household net worth rose to a record $7.7 trillion in the fourth quarter of 2013, up by 3.0 percent. According to Laura Cooper, an economist with RBC Economics, that works out to an astounding $218,100 per person. Cooper was unable to provide background on the distribution of those assets, due to the fact that National Balance Sheet Accounts data, are provided only in the aggregate.


So while median levels are surely such lower (due to a concentration of wealth among the top 10 percent of Canadians) the trend is clearly positive. Furthermore while Canadians’ debts are increasing, their ability to pay those debts off has been rising too. As a result, the ratio of household debt-to-income fell from 164.2 to 164.0 percent during the quarter, a trend that Cooper expects to continue.


The Canadian economy also grew faster than expected in December, at an annualized rate of 2.9 percent, outpacing both our Southern neighbours whose economy increased by 2.4 percent and analysts’ expectations (+2.5 percent).


Cheaper dollar boosts exports

The drop in value of the loonie relative to the US greenback could also prove to be a positive. While a weaker currency makes Canada as a whole poorer, by raising the price we pay for of a range of things from travelling abroad to buying imported goods, it has some surprising benefits.


For one the falling loonie makes Canadian goods more competitive in the United States, our largest export market. That has major consequences, because last year alone 19 percent of Canada’s gross domestic product came from goods shipments south of the border. In fact the loonie could fall even further says Douglas Porter, chief economist at BMO Capital Markets, due to downside risks ranging from the Quebec election, to recent dovish statements by Bank of Canada Governor Stephen Poloz and the resignation of Jim Flaherty as Canada’s Finance Minister, whom markets regarded highly. 


Continued downwards pressures on the loonie, coupled with the fact that the US economy has been growing steadily, albeit at a subpar level, and is expected to continue to do so, should further boost Canadian exports and thus job creation going forward.


Another surprising impact stemming from the fall of the loonie is it effect on Canadian house prices. The roughly 10 percent fall in the dollar compared to the greenback, has cut the relative costs of local residential real estate, compared to similarly priced properties south of the border. In short, the falling Canadian dollar could provide upwards support to foreign buyers, many of whom have been market major drivers in regions such as Toronto and Vancouver.





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