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Manufacturing sales declined 0.4 per cent in June. (Deborah Baic/The Globe and Mail)
Manufacturing sales declined 0.4 per cent in June. (Deborah Baic/The Globe and Mail)

Canada's economy and the TSX index have little in common Add to ...

Why has Canada’s economy been able to grow while the S&P/TSX index stagnates? It’s largely because the stock market bears little resemblance to the real world.

The Canadian energy and mining sectors make up almost half of the S&P/TSX composite index but less than five per cent of Canadian gross domestic product. Auto manufacturing forms 12 per cent of GDP but less than one per cent of the equity benchmark.

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A comparison of the equity index and domestic GDP turns up numerous disparities between the stock market and the real economy. In sum, these mismatches suggest we should be more optimistic about the outlook for the economy than stuttering stock prices would suggest. While a slowdown in the emerging markets is hurting Canadian stocks, it won’t ripple through – at least not immediately – to the businesses that employ the greatest number of Canadian workers and generate the biggest share of the nation’s output.

To be sure, there will be some victims. Resource industries are feeling the global slump most acutely.

For instance, while the vast majority of last year’s $86-billion in Canadian energy exports was directed to the United States, it was Asian demand that drove the price at which the oil was sold and thus determined the level of profit growth for Canadian exporters.

But even as earnings for the S&P/TSX oil producer index fell by 25 per cent in the second quarter, GDP growth accelerated from 1.7 per cent to 2.4 per cent.

A sharp decline in the auto industry would have much more drastic effects on the Canadian economy than falling profits in the resource sector. Auto manufacturing accounts for 12 per cent of the domestic economy and 20 per cent of Ontario’s GDP.

Yet, oddly enough, a plunge in the Canadian auto sector would barely ruffle investors. The S&P/TSX auto & components sub-index contains only three companies that together account for less than $13-billion in market capitalization and 0.008 per cent of the S&P/TSX Composite Index.

Thankfully for the real economy, the Canadian auto sector is largely (but not entirely) immune to the economic slowdown in China and Asia. The vast majority of production is sold within North America and the 20 per cent to 50 per cent fluctuations in revenues that routinely affect resource providers are rare in the auto industry.

There are numerous other examples of Canadian industries not represented at all in the S&P/TSX composite that would be largely unaffected by a slowing global economy. Government, including health care and education, accounts for 17.5 per cent of GDP and construction is 6.1 per cent. So don’t take the trajectory of the stock market as a barometer of how the economy is faring. The two bear little resemblance to one another.

 

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