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Briefing highlights

  • Endangering the economy
  • Stocks, Canadian dollar, oil at a glance
  • Australian central bank holds rates
  • Tesla stock surges
  • BP raises dividend
  • What analysts are saying today
  • Required Reading

The state of borrowing

Many Canadians are, of course, financially responsible.

But others are endangering Canada’s economy through their plump debts, the Macdonald-Laurier Institute warns.

And they can include governments and companies, Philip Cross, a Munk senior fellow at the MLI, said in a quarterly economic report.

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“Particularly worrisome has been Canada’s soaring debt-to-GDP [gross domestic product] ratio, which has exceeded 300 per cent,” said Mr. Cross, formerly Statistics Canada’s chief economic analyst.

“All sectors have gorged themselves on credit since interest rates were cut during and after the 2008-2009 great financial crisis,” he added.

“Households, corporations and governments each have raised their debt load to about 100 per cent of GDP. High debt levels across households and governments mean Canada is quite vulnerable to a downturn in the global economy.”

Consumers have led this “borrowing binge,” as Mr. Cross noted.

Indeed, Canadians are infamous for their borrowing habits. The key measure of household credit market debt to disposable income now stands at a high 175.9 per cent on a seasonally adjusted basis.

And the latest numbers, as tallied by Bank of Nova Scotia, show borrowing still going strong, though the pace of growth has slowed.

Total household credit growth rose 4.9 per cent in December from January, on an annualized basis, Scotiabank deputy chief economist Brett House and senior research analyst Alena Bystrova noted in their study this week.

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That’s down from November’s pace of 5.9 per cent.

“The deceleration of household credit growth in the month was driven mainly by slower, though still strong, mortgage growth … that was partially offset by a spike in consumer credit,” they said.

“Total household credit grew by 4.2 per cent year over year in 2019 compared with 3.5 per cent year over year in 2018.”

Debt levels are growing at a faster pace than incomes, underscoring “how household and government spending remain dependent on debt financing,” Mr. Cross said, noting that consumer insolvency filings have been rising.

“Debtors are always vulnerable to two types of shocks; one is a sharp hike in interest rates, the other is losing some income either through job loss or lower prices,” Mr. Cross said.

“The latter seems the largest threat to Canada in the short term, given that the global economic slowdown evident for some time in Europe and Asia now seems to have spread to the United States where growth decelerated from 3 per cent in 2018 to 2 per cent in 2019.”

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While Canada’s economy is vulnerable, we’re “very unlikely” to see a banking crisis, though.

Borrowing by Canadian governments is at almost 85 per cent of GDP, Mr. Cross noted, compared to 97.5 per cent in the euro zone and 99.4 per cent in the U.S. Both the euro zone and the Americans were forced to “spend liberally” to rescue banks during the crisis.

“Government borrowing in Canada is more skewed to the provinces because our federation is the most decentralized and because some provinces are especially vulnerable to slumps in key export markets and unwilling to adjust their spending accordingly,” Mr. Cross said.

“It is a testament to the vapidity of the recent federal election that Canada’s growing indebtedness was barely discussed,” he added.

“Federal government debt surfaced briefly as an issue, with the government arguing that it accounts for only about 30 percentage points (or one-tenth) of Canada’s overall debt-to-income ratio of 300 per cent. Completely ignored were the huge amount of debts accumulated in the corporate, household and provincial government sectors and the vulnerability this debt creates for a highly cyclical economy like Canada’s.”

Also just this week, Toronto-Dominion Bank warned that “the rise of nonfinancial corporate leverage in Canada is an emerging risk.”

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Indeed, more company income is being used to service debt, and “this debt service ratio is high relative to history and international peers,” TD economic analyst Brett Saldarelli and senior economist James Orlando said in their study.

“Should the economic backdrop deteriorate, the level of corporate indebtedness would act as an amplifier and increase the severity of a recession,” they said.

The “indebted Canadian consumer” and high house prices will probably remain in the spotlight this year, as they have for many years, added Brian Belski, Bank of Montreal’s chief investment strategist.

“While we agree that the Canadian consumer is clearly stretched with elevated personal and mortgage debt, we continue to believe that as long as employment is growing, income growth remains strong, and increases in debt servicing remain manageable, these concerns are likely overblown,” Mr. Belski said in his latest market outlook.

“From our perspective, these fears pose a much greater risk in the next economic downturn, not during a period of economic growth. Over all, this is a headwind that the domestic consumer has faced and will face for years to come, and one of the main reasons we continue to have a structural overweight in U.S. equities.”

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Markets at a glance

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Australia holds rates

Australia’s central bank held its key cash rate steady at 0.75 per cent today, saying the “outlook for the global economy remains reasonable.”

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Reserve Bank of Australia governor Philip Lowe cited as uncertainties the trade tussle between the U.S. and China, which actually has made strides, and the coronavirus outbreak.

“The RBA’s decision to stay on hold today was justified by the already low interest rates and the fact that the impact of prior cuts will continue to filter through to the economy,” said Tuuli McCully, Bank of Nova Scotia’s head of Asia-Pacific economics.

“Moreover, the Australian dollar’s recent weakness may have been another factor behind the decision.”

Ticker

Tesla surges

From Reuters: Shares of Tesla Inc. surged 15 per cent Tuesday to hit the US$900 mark, extending a stunning rally that has more than doubled the company’s market value since the start of the year as more investors bet on chief executive officer Elon Musk’s vision. The latest surge was partly fueled by Panasonic Corp. saying on Monday its automotive battery venture with Tesla was in the black for the first time. Some analysts have attributed the rally to short covering, as well. Short interest in Tesla stood at 13.8 per cent as of Jan. 30, according to Refinitiv data.

BP raises dividend

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From Reuters: BP raised its dividend and said it had completed a US$1.5-billion share buyback program in a sign of confidence in its growing oil and gas business on the last day in office for chief executive officer Bob Dudley. As Bernard Looney prepares to take the helm, BP struck a positive tone even as oil prices slumped to a near year-low on concerns over China’s coronavirus, bucking a trend among peers that saw a sharp slowdown in revenues last week. The shareholder rewards came as the London-based company reported a 26-per-cent drop in fourth-quarter profit, which easily beat forecasts, and US$2.7-billion in charges.

Court to rule on Trans Mountain

From Reuters: Canada’s Federal Court of Appeal is scheduled to rule Tuesday whether Prime Minister Justin Trudeau’s government adequately consulted indigenous people when it approved last year an expansion of the Trans Mountain oil pipeline. Approval would clear some uncertainty over the twinning of a 67-year-old pipeline that runs from Alberta to the British Columbia coast. If the panel of judges decides that indigenous consultation - required by law for major Canadian resource projects - was insufficient, the decision could further delay what the energy industry says is a vital project. Ottawa bought the pipeline in 2018 to ensure expansion proceeded, offering a lifeline to Alberta’s struggling oil patch.

Expect Trump to boast on economy

From The Associated Press: A portrait of a robust U.S. economy is sure to take centre stage tonight when President Donald Trump gives his third State of the Union address. It is an economy that has proved solid and durable yet hasn’t fulfilled many of Trump’s promises. Nine months before the election, the economy keeps growing steadily if only modestly. Unemployment is at a half-century low. And consumers, the lifeblood of the U.S. economy, continue to spend. Average pay is rising faster than when Trump took office three years ago, with the largest percentage gains now going to lower-wage workers. Some research has found that this trend, which began in 2015 before Trump’s election, partly reflects higher state minimum wages. Economists warn, though, that the U.S. expansion, now in its record-long 11th year, faces an array of threats.

Trade confidence sinks

From Reuters: Trade confidence among Canadian exporters fell to its lowest level in nearly a decade, Canada’s export credit agency said, as businesses wrestle with protectionist policies and fret about the global economy. In its biannual survey of 1,000 Canadian exporters, Export Development Canada said its trade confidence index fell to 69.3 per cent, the lowest level since 2012 and 6 per cent below the survey’s historical average.

Also ...

What analysts are saying today

“Alphabet, Google’s parent, will be in play today following the release of its fourth-quarter earnings last night. [Earnings per share] were US$15.35, topping the US$12.53 forecast. Revenue for the period was US$46.06-billion, which undershot the US$46.94-billion forecast. In a change of pace, the company revealed a detailed breakdown of its YouTube division - which saw annual ad revenue jump by 35.7 per cent on a year-on-year basis.” David Madden, analyst, CMC Markets

“They say don’t fight the Fed and markets seem to be keeping the mantra for the People’s Bank of China. Authorities can’t prop up markets indefinitely but traders for now are taking the cue to buy the dip. We are now expecting a volatile recovery from last week’s drubbing across equity markets.” Jasper Lawler, head of research, London Capital Group

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Required Reading

Bay Street targets Toronto apartments

Following its billion-dollar sale of 44 rental apartment buildings in the Greater Toronto Area, private equity firm Q Management LP is fundraising for a $500-million war chest to do it all over again. Tim Kiladze reports.

Tariffs could be cut

Canadian softwood producers are getting a surprise break from the United States, Brent Jang writes. A preliminary decision by the U.S. Department of Commerce is expected to result in sharply lower duties by August for most Canadian producers of softwood lumber. The Commerce Department ruled late on Monday that tariffs imposed on most Canadian lumber sold south of the border could be reduced, after conducting an administrative review of anti-dumping and countervailing duties applicable for 2017 and 2018.

Testing Trudeau

Ontario Premier Doug Ford’s industrial emissions plan is testing Justin Trudeau’s willingness to compromise, Adam Radwanski writes.

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