So far this year the TSX has soared 16 per cent, with every sector participating. Not much, if any, of this has been due to anything that Canada has done, as much as the fact that it is a reflection of global sentiment. It should go without saying that real GDP locally, destined to come in at less than a 1-per-cent annual rate for the first quarter, has had little to do with this rally.
In fact, outside of health care, the best sector in the TSX has been technology, but this has been part and parcel of a massive global shift to this space. Materials also have benefited from the sharp rebound in commodity prices, reflecting a global supply squeeze for many base metals as well as the push from the huge fiscal-easing initiatives in China.
And of course, the TSX energy space has been a huge leader, and why not? The Canadian-dollar price of oil has shot up more than 70 per cent this year to $72 a barrel, a nine-month high. The TSX, in general, has an 85-per-cent positive correlation with the oil price – in the past year, this relationship has doubled in intensity relative to the average of the past decade. Embedded in the current valuation of the TSX energy sector is a price of US$52 for a barrel of West Texas Intermediate crude, which makes the upside potential (and limited downside) still looking rather attractive.
That said, stock market valuations are back to where they were, if not above, the levels prevailing before the problems surfaced last October. Fully priced, to say the least.
The biggest constraint to Canadian growth and market prospects is the consumer and, in fact, these stocks have lagged behind this year and by a wide margin. It’s all about debt. Household debt in Canada relative to after-tax personal incomes has hit a new record high of 178 per cent. It makes a mockery of the 148-per-cent credit bubble ratio peak in 2006-07. Note that in China and Italy, these household debt-to-income ratios stand at 106 per cent and 87 per cent, respectively.
One can come back with a comment on how asset-rich Canadians have become. But that rings a bit hollow now that the housing price boom has run its course. The ratios of debt-to-assets (17.3 per cent) and debt-to-net-worth (20.9 per cent) have not been this high in a good six years. This mountain of debt is our biggest enemy against future growth – future growth has already been spent and leveraged.
Even with ultralow interest rates, the principal repayment on the massive amount of existing obligations means that Canadian households now spend 15 per cent of their disposable earnings on total debt-servicing charges. The last time the aggregate debt-servicing ratio was this high was back at the peak of the previous economic cycle in 2007. No wonder the Bank of Canada switched gears so quickly. Look for a further push away from any previous thought of raising rates at Wednesday’s post-policy meeting press statement.
Households have lost their appetite for debt, by and large, with personal and mortgage credit growth together slowing discernibly in the past year to a 3-per-cent pace, the lowest in 35 years. But even as Canadians run hard to climb out of their debt morass, disposable income growth has been slowing at an even faster rate, a puny 2.2 per cent year-on-year.
But how can that be, with the ballyhooed unemployment rate at a seemingly drum-tight 5.8 per cent? Well, because productivity has been so moribund. And also because a part-time job is not the same as a full-time job – yet, they’re treated the same in the unemployment-rate statistics. The fact is full-time employment is barely expanding, at an annual rate of little more than 1 per cent. We are creating “gig-like” part-time jobs at nearly three times that pace. When you look at the broadest gauge of labour market slack that Statistics Canada reports, the “R8” supplementary measure, the unemployment rate is closer to 9 per cent than it is to 6 per cent. That helps explain a lot of the softness we are seeing in income growth, along with the fact many of the jobs being created are in low value-added segments of the service sector.
Sadly, the latest federal budget did not deal directly with this issue, and actually moved to encourage Canadians to take on more debt, with taxpayer assistance no less, to spur on the housing sector through such measures as its First-Time Home Buyer Incentive. This is amazing in its own right. With national household formation running at the same level as housing starts at an annual rate of about 200,000, we have finally seen, in recent years, the supply side catch up with the demand side. And the fact that we have just under six months’ of housing supply in the resale market points to finely balanced conditions in the residential real estate market.
But leave it to the government to fight the last war. The current war it should be fighting is the scarcity of income growth that the economy is generating. This is what the looming election campaign should all be about.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.
David Rosenberg