David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
The Canadian dollar has broken sharply lower to below 74 US cents, back to where it was in late May. At that time, oil prices (WTI) were US$68 per barrel; today they are near US$80. The CRB index, which tracks commodity markets, was 540 in May and has since edged up to 550. So here we have seen the loonie go back to the same level it was three months ago when commodity prices were lower than they are now.
This speaks to a downgrade of the domestic economy, and deservedly so.
We have now seen employment decline in two of the past three months and the number of weekly hours worked stagnate in the March-July period. The unemployment rate has climbed 0.6 of a percentage point from the cycle low to 5.5 per cent, a signal that a recession is quickly approaching.
Meanwhile, June’s real GDP declined and the trade picture has recently shifted from surplus to deficit. The once-hot housing market is also showing vivid signs of cooling down. Strip out the year-over-year surge of 30.6 per cent in mortgage interest costs, and headline inflation is running near target at 2.4 per cent, and at 2.3 per cent for the core index.
At the same time, the Bank of Canada is signalling another rate hike, which is beyond nutty, but is sure to be the last of this economic cycle.
From a big-picture standpoint, the Canadian economy is mired in weak fundamentals. The budgetary situation is out of control and there is no serious attempt in Ottawa to promote fiscal stability. There is a false glow attached to a 1.9-per-cent year-over-year real GDP growth rate at a time when the pace of population growth is running at a 2.4 per cent annual rate, courtesy of the immigration boom. That means the economy, in real per-capita terms, is contracting by 0.5 per cent on an annualized basis.
The real problem with the domestic economy is its composition. There is too much reliance on consumer spending, which has expanded by more than 20 per cent in the past decade. Housing has seen closer to high-single-digit growth. These are non-productive sources of growth. Business capital spending on both machinery/equipment and plants has contracted 10 per cent apiece over the past 10 years. Spending is in the wrong areas of the economy in terms of generating lasting positive multiplier impacts.
What is shocking is that there has been zero growth in these productive areas of the private sector over the past decade. That scenario is the product of a government which has lacked the will to use the tax and regulatory system to promote capital investment – it instead focuses on redistributing national income. As such, productivity in Canada is down 1.4 per cent year-over-year and has contracted outright sequentially for four consecutive quarters and in 10 of the past 11.
This is what is missing in Canada, and it is a sad state of affairs because productivity growth is the mother’s milk for future economic prosperity. Instead, what Ottawa has done is attempt to camouflage the situation via the most aggressive immigration program since the CPR embarked on building the transcontinental railway in the late 1870s.
This is not to say immigration is a bad thing. But its fast pace does complicate the inflation picture – especially in housing – while the beauty of productivity is that it promotes noninflationary growth and makes the Bank of Canada’s job a whole lot easier.
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