Saeid Fard is a blogger and digital designer in Vancouver.
When the United States and much of the world entered into a recession following the global financial collapse of 2008, Canadians escaped relatively unscathed, thanks in part to a well-regulated banking system that had greater reserve requirements and was less entangled in the global financial web than its U.S. and European counterparts. But an unfortunate consequence of our insulation from global ills was that we did not subject ourselves to the kind of economic self-examination forced on other countries. Instead, consumer debt continued to rise, real estate prices continued to escalate and our economy grew worryingly reliant on just two industries: petroleum and housing.
Off the backs of those industries, Canada’s gross domestic product (GDP) grew by 19 per cent between 2010 and 2014. But most of that growth was driven by factors outside Canada’s control. China’s economy was booming and, with it, its insatiable need for resources. Oil prices were fixed artificially high by the Organization of Petroleum Exporting Countries (OPEC), Iranian petroleum supply was cut owing to sanctions, millionaires from precarious economies, including China’s, increasingly sheltered their wealth in havens such as Canadian housing, and “fracking” technology unlocked new petroleum resources in Western Canada.
Many remain optimistic that petroleum prices will recover, but there is strong reason to believe low prices are here to stay. Unlike previous price vacillations that were created by shocks in supply or demand, the price-setting regime of oil has changed. In the past, prices were set monopolistically by OPEC; they’re now set competitively. Low-cost producers, such as Saudi Arabia, used to intentionally lower output to create artificial shortages that boosted prices. With such high prices, more expensive resources such as oil sands and shale oil became viable. Realizing that high prices would eventually lead to OPEC’s demise, the cartel stopped price fixing. The world is now sitting on massive inventories of oil that will take years to consume. On top of that, Iranian oil sanctions are being lifted, adding to cheap supply. Barring some geopolitical catastrophe, the new prices are here to stay.
Given Canada’s recent commitments in Paris to reduce its carbon footprint, all signs point to less output of carbon-reliant petroleum, not more. From a policy perspective, there is good reason to believe we are past the glory days of Canada’s oil rush.
Housing is the only thing keeping the Canadian economy afloat. Unfortunately, as the United States saw in 2008, an overreliance on the housing sector can be a recipe for disaster. Pundits can bicker over the differences between the U.S. and Canadian housing booms or whether we are indeed experiencing a bubble, but one simple parallel points to a startling problem: We are building a lot more houses than we really need. From 2006 to 2011, Canada’s population grew by 3 per cent while housing stock grew by 7.1 per cent (Canada Mortgage and Housing Corp. housing stock surveys are compiled every five years, so we should have updated numbers this year). According to Statistics Canada, household sizes stayed steady over that period, so additional production was likely not purchased domestically.
As many have argued, evidence suggests that additional production was and is being bought by foreign investors. Indeed, CMHC reports that the share of foreign ownership of condos in Toronto and Vancouver grew by 22 per cent and 51 per cent respectively – in 2015 alone.
No country in history has been able to sustain continued housing overproduction. Whether there is a price correction now is irrelevant to the fact there will inevitably be a production correction. Foreigners are not attached to a domestic housing market the way locals are, their money can leave just as quickly as it enters, making the eventual correction all the more dramatic.
People can disagree on the magnitude and timing of an eventual correction, but good policy plans for the worst outcomes, not just the best. Canada needs to plan for a potential post-housing-boom and post-oil-boom economy. Disappointingly, Prime Minister Justin Trudeau’s government has not indicated any plans to curb foreign or non-resident investment. This short-term bid to avoid the inevitable will have long-term consequences.
For the past decade, we have doubled down on an economic plan that has made us less diversified and more susceptible to global economic reverberations beyond our control. Between 2000 and 2013, Canada’s economic complexity index (ECI), a measure of economic diversity, shrank to 0.70 from 1.1. As a point of comparison, the ECI in the United States remained steady over that period. A high ECI protects economies from turbulence and, as its creators have pointed out, it’s also a good predictor of long-term GDP.
Conversely, when prosperity is a result of a few outside influences, it can vanish as quickly as it appears. In 2015, Canadians got their first taste of this principle when the price of crude collapsed, bringing with it the greatest single-year drop in the value of the Canadian currency.
Historically, when economic activity declines, monetary policy – in the form of lower interest rates – is used to spur consumption. Unfortunately, monetary policy moves are no longer at our disposal. Interest rates are already at historic lows and while the Bank of Canada has toyed with the idea of negative rates there is no evidence they would be effective. For the macro-economically minded, there is little evidence that monetary policy is effective at any point below the 3-per-cent threshold. Lowering rates would also intensify our worryingly high levels of private debt.
So what can Canada do?
With a weak dollar, Canada’s saving grace could be manufacturing, but low exchange rates take years to cascade into foreign investment and increased capacity. Our manufacturing sector has also been so dominated by oil and gas that a material expansion will require not just increased utilization of our existing manufacturing capacity, but entirely new manufacturing capacity.
Tourism, technology and film production can also benefit from the cheap dollar, but their share of the Canadian economy is too small, at least for the time being, to make a dent in general output.
For far too long, policy makers have been mired in easy economic formulas. Cheap money and a focus on resource exporting and homes have taken priority over what are increasingly recognized as the essential factors behind robust wealth creation: people and cities.
In a long-term sense, there’s only one thing that creates wealth: technology. Technology allows us to produce more with less – everything else is short-term noise. And most technology is produced in cities. They are home to centres of research, innovation and commerce. Nurturing cities that produce, attract and retain talented people is how mature 21st-century economies continue to develop.
If the Canadian government is serious about long-term growth, it must focus on how it can build cities and policies that attract people and businesses. But we have not been headed in the right direction on this front.
Our tax and regulatory policies have been directed toward the resource sectors for the past decade, instead of being focused on facilitating new business. Even now, there are proposals to change the treatment of stock options, which would devastate Canada’s fragile startup ecosystem.
Likewise, there has been little political will to develop urban infrastructure. Toronto and Vancouver, for instance, both need serious investments in public transportation but politicians are unwilling to increase taxes to fund badly needed projects. Added to that, housing prices are pushing out some of our most talented people in favour of investors with no meaningful economic ties to our economy. Again, short-term focus and populism have overshadowed prudent policy making.
Canadians have founded some of the most influential new businesses in the world, such as Vice and Uber. The problem is that they’re doing it in the United States. There are more than 350,000 Canadians in Silicon Valley alone. The brain drain of the 1990s was focused on medical doctors – the thought of losing our health providers galvanized policy makers to action. But for some reason, losing an entire cohort of our most talented engineers, managers and entrepreneurs, and with them thousands of jobs and billions in tax revenue, has not prompted the same political attention.
Recessions are inevitable but they can also be positive. They result in a more optimal allocation of capital within an economy. They punish overly risky practices. They make businesses more efficient. They lead to more efficient prices. And they open the door to new and better businesses. It seems Canada’s politicians have been so set on avoiding short-term downturns that they’ve forgotten to plan for a long-term future.Report Typo/Error