Canada returned to growth in April after regressing in February and March according to a new report from Statistics Canada. While the upswing is marginal, 0.1 per cent for the month, it is welcome news for an economy still struggling with the after-effects of the oil shock. To temper the news, the agency added that another drop is likely for May when the Fort McMurray wildfires came into play.
James Dutkiewicz is chief investment strategist with Sentry Investments
and believes Canada is far from out of the woods yet when it comes to its economic malaise.
“January was a bogus number,” he says. “In a broader context, I think about the Canadian economy from 2009 to today. The recovery in 2010 was largely on the back of China’s massive stimulus that was very beneficial to commodities. That helped the Canadian economy come back faster than any other first world country.”
While undoubtedly a blessing at the time, the long-term implications of Canada bouncing back so quickly are now being felt, according to Dutkiewicz
“Our banks had capital to lend, people had jobs and money was free because interest rates globally were very low,” he says. “That made a debt bubble and gave us the housing issues we currently have. Now the Canadian economy is much more vulnerable because we can’t expect consumers to continue to drive growth.”
In its last report, the IMF downgraded its growth prediction for Canada from 1.7 to 1.5 per cent. That decision was vindicated when Statistics Canada later revealed that the economy here had contracted in both February and March. The backward step was surprising to some, but not if you consider the longer term trends with the domestic economy, says Dutkiewicz.
“That January number, when we were the bottom for oil prices, I think it was an odd number. I don’t know if it was a statistical error, but the payback in February and March meant much more.”
He continues: “The vulnerability of the Canadian economy is pretty elevated right now. The Feds in Ottawa can talk about deficits and fiscal policy to goose the economy, but what really needs attention is the egregious situation at the provincial level. By our calculations, Canadian government debt – federal and provincial – it’s essentially the same as in the early to mid-90s.”
Dutkiewicz’s warnings are being mirrored by many on Bay Street, which suggests Canada’s growth is likely to remain anemic until at least the end of this year.
“The household sector, at 167 per cent of debt-to-disposable income is tapped out,” he says. “We can survive as long as rates are low and we don’t go into recession. Canada’s vulnerability means that if a shock hits, there is only a limited amount of maneuvering that can happen. Our view is that the economy will continue to grow, but only if the US economy also grows along trend, which is about 2 per cent.”
Canada’s debt levels need addressing, says Holliswealth
RBC forecast lower growth for 2016