Canadian Economy Contracts
Canadian gross domestic products (GDP) contracted in October, a sign the Canadian economy is not as resilient as some thought. And it comes at a terrible time. Canadian’s are taking on record amounts of debt, wages are flat, and the unemployment rate remains near seven percent. The idea of Canada slipping into a recession in 2017 is not out of the question.
After four months of modest but inconsistent growth, Canada’s monthly gross domestic product (GDP) contracted -0.3% month over month in October.1 This is a huge disappointment. Economists had forecast Canada’s GDP in October would ring in at zero. In the first nine months of 2016, Canada’s GDP has contracted four times.
This wasn’t a case of one sector weighing down the data. The decline was broad based. Economic activity declined in 13 of 20 sectors tracked by Statistics Canada. The mining, oil and gas sector fell by -1.2% while construction was down -0.5% (the fifth decline in six months).
Retail trade increased 0.7% month over month, which means that the country is creating more jobs for waitresses and waiters. This helped Canada’s unemployment rate dip to 6.8% in November. But not all is as it seems.
Unfortunately, the improved jobs data came because more people, like retiring Baby Boomers, were leaving the workforce. Moreover, many of the jobs that were created were low-paying, part-time jobs. On top of that, youth unemployment in Canada remains near 13%.2
Will Canada Slip into a Recession in 2017?
Canada’s inconsistent GDP data goes to show how weak and vulnerable the economy is and that it is susceptible to a recession. Because of the unexpectedly bad economic data, it is widely expected that the Bank of Canada will cut interest rates even further in the first half of 2017.
It is hoped this will help stimulate the economy. But years of artificially low interest rates hasn’t worked yet. It is unlikely to kick-start the economy, but it will encourage more and more Canadians to take on additional debt.
Canadian household debt hit record levels in the third quarter as the ratio of disposable income climbed to 166.9%. This means that for every dollar of disposable income, Canadian households owe $1.67.3
Canadian households have been able to borrow cheap money because the Canadian housing market has been so strong. A weakening economy though could lead to a recession, which translates into higher unemployment. This will make it very difficult for those with mortgages and bigger debt loads—and will lead to foreclosures.
In recession, Canadians spend less money, which means delaying the purchase of a home; at least until the economy shows signs of sustained growth. This will inevitably put a chill on property prices. When housing prices fall, household wealth goes down with it. This will also put a crimp in consumer spending, which is a huge driver of GDP growth in Canada.
And the future doesn’t look particularly bright. According to one report, Canadian economic growth is forecast to be stall at two percent (or less) until 2030. From 2016 to 2020, GDP is expected to be just 1.8%; from 2021 to 2030, it will improve to just two percent.4
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Will the country’s weak GDP continue and carry over into 2017? If so, the idea of Canada slipping into a recession isn’t out of the question.
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- “Gross domestic product by industry,” Statistics Canada web site, December 23, 2016; http://www.statcan.gc.ca/daily-quotidien/161223/dq161223a-eng.htm.
- “Labour force survey,” Statistics Canada, December 2, 2016.
- “National balance sheet and financial flow accounts, third quarter 2016, Statistics Canada web site, December 14, 2016; http://www.statcan.gc.ca/daily-quotidien/161214/dq161214a-eng.htm.
- “Canada’s economy to lose ground globally as growth stalls at 2% for more than a decade,” Financial Post web site, December 28, 2016; http://business.financialpost.com/news/economy/canadas-gdp-growth-to-stall-at-two-per-cent-for-more-than-a-decade-report-says.