I was out with a group of friends this weekend, one of whom said casually that Europe was coming back. Luckily, he clarified that this was a reference to the Ryder Cup (the international golf tournament) and not the global economy before I could begin to pronounce on the key economic headwinds slowing Canada’s gross domestic product (GDP) growth.
Clearly, I need to get out more.
In my defence though, this was on my mind for good reason. A new report from Statistics Canada landed Friday that measured Canadian economic growth at just 0.2% in July. While that beat expectations, year-over-year GDP growth remains below 2% (at 1.9%).
I spoke with Robert Kavcic, an economist at BMO Capital Markets about the result. I asked him if he agreed with the point Diana Petramala of TD Economics made last month that the state of Canada’s economy is in large part a result of weak productivity numbers.
“There’s probably some truth to that,” said Kavcic. But there’s more to the story. As he put it, “there is a pretty wide range of headwinds out there that is keeping growth under 2%.” Three examples: Consumer spending is weak, the U.S. recovery remains soft (which is tough on our exporters) and there’s reason to expect “increased pressure” on the Canadian housing market in the near term, he told me.
We can add Europe and a number of emerging markets to that list, too.
Interestingly, weak consumer spending is both a good and bad news story. While consumer confidence is a key driver of economic growth, what we’re seeing right now is a much-needed deleveraging process. Canadians are paying off debt.
“It seems to be taking place gradually,” said Kavcic. “If you look at the pace of consumer borrowing, for example, that’s really slowed over the past year or so … It does look like Canadian consumers are reigning it in a little bit.”
Equifax Canada reported this summer that non-mortgage debt grew 30% more slowly during the year ended June 2012 than it did a year before.
This is what Ottawa was aiming for. “The Bank of Canada has been warning consumers about building up too much debt for quite some time,” Kavcic explained. Also, “stricter mortgage rules that were put in place in early July were designed to curb borrowing in the housing market. It seems to be working.”
Add this to Canada’s low inflation rate, and it’s clear there is little pressure on the Bank of Canada to raise interest rates. BMO Capital Markets doesn’t expect a hike in the overnight rate until October 2013.
Here are a few highlights from the year-over-year GDP growth rates by sector:
- Goods production is up 2.5%. Construction rose 3.4%, manufacturing is up 3% and mining is up 1.6%.
- Services are up to, by 1.7%. Retail rose 2.9%, finance is up 2.6% and wholesale is up 1.1%. Transportation is flat and government is down 0.9%.