It's time we come to grips with the reality of the Canadian economy: It's not healthy, and the lower dollar hasn't been enough to make it healthier.
Friday's employment and trade numbers underline that despite a 75-cent (U.S.) currency that was supposed to spur an export-led recovery in Canada's growth, the things that are supposed to be turning the corner simply aren't. Export volumes fell for the fifth consecutive month. The country's already bloated trade deficit swelled to a record $3.6-billion (Canadian) in June. The job market is weak: Employment fell by 31,000 jobs in July, the worst performance in nine months, pushing the nation's unemployment rate up to 6.9 per cent from 6.8.
While the drop in hiring and uptick in unemployment will garner more of the public hand-wringing, of bigger concern is the extended slump in exports. After five months in which the country has dug itself an unprecedented cumulative trade hole of more than $16-billion, no one can argue that this is some sort of temporary blip. And unlike last year's trade weakness, we can't dump this on the doorstep of plunging oil prices.
Canadian exports of non-energy products have fallen in four of the past five months, and are 7 per cent below their December, 2015, levels.
This isn't according to plan at all. With the Canadian dollar still wearing most of its sharp losses stemming from the oil slump (it's nearly 20 per cent below its mid-2014 peak), the currency was supposed to be plenty cheap enough to lure foreign demand for Canada's goods, especially from the relatively strong U.S. economy that accounts for fully three-quarters of Canada's exports. The envisaged export renaissance was supposed to eventually kick Canada's oil-related malaise to the curb and carve a new non-energy path to a happy recovery.
The U.S. economy, after some speed bumps of its own, looks to be humming along again – as evidenced most recently by Friday's report of a strong 255,000-job rise in its labour market in July. But Canadian exports seem to have lost their way to the party.
In the absence of this export growth, we're left with a Canadian economy being driven by little more than housing and consumer spending (low interest rates will do that for you). Which brings us to those employment numbers – because ultimately, cheap credit or no, job and wage growth are what sustain consumer demand.
The weak July number is merely the exclamation mark on a multimonth trend of generally sluggish labour market indicators. The country has added a puny 12,000 jobs over the first seven months of the year; normally, it averages more than that per month.
Worse still, average hourly wages, which were growing at better than 3 per cent year over year at this time last year, slowed to just 1.8 per cent in July. Wages actually declined in the year to date. Without better growth in hiring and wages, how much longer can the consumer/housing strength continue to prop up the Canadian economy?
Friday's data prompted a swift response from financial markets, which until now have perhaps been too complacent about the clouds gathering around the Canadian economy. Traders knocked nearly a full cent (U.S.) off the Canadian dollar, as the bond market priced in a serious possibility (now about one-in-three) that the Bank of Canada will have to cut interest rates before the end of this year to bolster a flagging economy.
This wake-up call might prove to be a very healthy thing.
Despite the Canadian dollar's past declines against its U.S. counterpart, it has been losing ground in an increasingly heated global battle to secure a good seat on the coattails of the U.S. expansion. Central banks all over the map are cutting interest rates and easing monetary policy, at least in part to exert downward pressure on their currencies that will give them a leg up in the export market to offset struggling demand at home. As a result, the Canadian dollar has looked like less and less of a bargain this year, and that is reflected in the erosion of Canada's export growth.
The market might bring the dollar down to a more competitive level all by itself, to reflect these growing questions surrounding the country's economic prospects. But a legitimate question is whether the Bank of Canada should put a rate cut on the table – something that would hasten the process.
In practice, the central bank doesn't try to guide the dollar to any particular level. But the reality is that the country's growth prospects, absent something (like a boost from a weaker currency) to rekindle exports, look increasingly in doubt. A slower growth path would almost certainly dictate an interest rate cut by the bank – and the key stimulative consequence of a cut would be a weakening of the currency.
It's harsh medicine, to be sure – especially in a country grappling with excesses in its housing market, where lower rates could pour gasoline on the fire. Still, if exports are going to lead this recovery, it might be the best prescription to kick open the stubbornly sticky door to the critical U.S. market. And without something to open that door, Canada's economy may soon justify a rate cut anyway.