The miserable truth to Canada’s economic recovery

A lot of people are going to hate the economic recovery.

Where we are now is the economic sweet spot – low interest rates to support our consumption of houses, cars and such, plus reasonably solid underlying fundamentals. A gauge of economic stress called the misery index now sits at its lowest point in 35 years for Canada.

Economists have been forecasting a return to more normal levels of growth since the last recession ended in 2009. Instead, we've seen persistently slow growth that has suited a lot of us very well. If you owe a bunch of money, these times could be the best you'll ever know because of low rates. You won't know what you've got till it's gone, to paraphrase Joni Mitchell.

You can find economic data to back up any view at all about what's happening out there right now. Middle-class stress, middle-class success. Excessive borrowing, manageable debt. Into this mix, let's throw some numbers about all the retail therapy we've been enjoying.

Start with new cars, SUVs and trucks. This year is shaping up to be yet another record-breaker in sales over all, but it's luxury and high-performance car makers that are generating the biggest increases. According to the Good Car Bad Car website, Audi, BMW, Lexus, Lincoln and Mercedes-Benz all had sales increases in Canada of 16 per cent to 22 per cent for the first five months of 2015. Porsche sales surged 34 per cent.

Houses are also selling well, even in cities beyond Vancouver and Toronto. Calgary's doing pretty well considering the impact of lower oil prices, and modest slumps in cities such as Ottawa and Montreal seem to have halted, at least for the moment.

Travel is another area where we're spending with enthusiasm. The Hotel Association of Canada forecasts that the average occupancy rate will be 64 per cent this year, tied for 2014 as the highest since 2007. And check out Air Canada's numbers: The airline reported its second straight year of record profits in 2014 at $531-million.

The April tally of retail sales showed a small decline on a year-over-year basis, a sign of overall economic sluggishness. But hidden by that overall number were niche increases of 8 per cent for jewellery, clothes and home furnishings, and 10 per cent for shoes.

The economy is definitely weak by traditional standards – it shrank 0.6 per cent in the first quarter of 2015 on an annualized basis and grew 2.4 per cent in the final three months of 2014. Three per cent would be a very solid but not outrageous annualized growth rate. However, we're still in pretty good shape in terms of a measure of economic stress called the misery index. Created by an American economist named Arthur Okun, the misery index is the sum of the unemployment rate and the inflation rate.

It turns out that in this recent period of weak economic growth, we happen to have the lowest reading on the misery index in 35 years. The index stood at 7.7 per cent for May, which compares with an average of 11.7 per cent going back to 1980 and a reading of 8.2 per cent in 2007, before the global financial crisis and recession. You want to see what real misery looks like? In 1982, the misery index hit 21.9 per cent thanks to an unemployment rate of 11 per cent and an inflation rate of 10.9 per cent.

Canada's economy is in a position where unemployment is fairly low over all and inflation is subdued enough to allow the Bank of Canada to keep borrowing costs at historic lows. What could upset the balance? A pickup in economic growth feeds inflation and gives the central bank the excuse it needs to start pushing interest rates higher.

Higher rates will help savers and conservative investors relying on income from bonds and guaranteed investment certificates, but they'll be hard on borrowers. As the economy heats up, they'll be paying more on floating rate debt such as home equity lines of credit and variable-rate mortgages. People with fixed-rate mortgages will renew into higher rates and see their monthly payments increase. That means less cash to spend on cars, jewellery, shoes and houses.

Stronger economic growth should lower the unemployment rate, create better quality jobs (full-time instead of part-time or contract work) and generate higher wage increases. And yet, a lot of indebted households are going to be worse off. That's an economic risk no one's talking about.