CanCham News
Economic Slowdown in Canada?
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The last couple of months has seen several headlines suggesting that Canada is in economic slowdown. This was largely down to three factors: publication of the latest GDP report, showing Canada’s growth to be the lowest in 60 years; the federal government’s announcement of expansion to the Canada Pension Plan; and rumoured future government intervention to cool down the booming housing market. So is doom and gloom ahead? That all depends on your perspective. Firstly, the “lowest growth in 60 years” (Financial Post, August 2, 2016) is exceptionally misleading. In fact, whilst Canada’s GDP growth can hardly be described as superlative, it’s year-onyear rate is about level with Germany: at the halfway point in G7 rankings. In fact, the 60-year headline comes from the assertion that the economy’s two-year expansion rate of 1.2% is the slowest outside of a recession in the last sixty years. If that last sentence seems long, that’s because there are two many qualifiers in it for it to hold credence. We may not technically be in a recession now but the global economy as a whole is in a perilous state. The world’s richest countries have not properly covered from the 2008 Global Financial Crisis. That’s largely because governments persist in prioritising the reduction of public sector over private sector debt, while central banks attempt to boost debt-ridden consumption by… err… incentivizing banks to provide us with yet more private debt. That includes the Bank of Canada, whose base overnight rate was at 4.5% at the beginning of 2008, has hovered between 1% and 0.25% since January 2009. The federal government itself admits that the proposed expansion of the Canada Pension Plan would reduce economic and employment growth rates. That’s because the changes would gradually increase mandatory contributions. That would further reduce disposable income levels in a country where annual inflation between 2012 and 2015 – the years of the austerity policy – averaged out at
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just 1.38%. In fairness, Trudeau’s government is politically courageous on this matter. It is effectively exchanging short-term economic gains for a larger retirement pot in the future. If the federal government tries to intervene in the housing market, it would likely do so by increasing interest rates and/or putting stricter requirements on mortgages. This as been widely reported as a threat to the economy. But then that comes from the same mindset that brought us the GFC: let house prices go up, so that the whole economy benefits. The reality was in fact that the banks benefitted and everyone else lost out. A relief in pressure on the house price bubble would not necessarily eliminate the chance of the whole thing bursting but it would at least mitigate against some of the effects when it eventually happens. For that reason, an increase in the base interest rates would be a step in the right direction, if it indeed had the desired effect of making banks charge higher rates for loans. Putting more restrictions on new mortgages would also prevent the private debt rate from increasing. In a world where governments blindly implement a cocktail of zero or negative interest rates, austerity and quantitative easing, despite results showing this is clearly not working, it seems churlish to criticize a government which is actually investing in its people and potentially trying to deflate the housing bubble. However, the issue is that these proposals go nowhere near far enough. If the government really aims to prevent the bubble from happening altogether, reducing interest rates is a step, so is giving more pension protection; but it’ll have to something much more drastic. It will have to invest in education, health and infrastructure – all the things which help increase economic and social well-being. Furthermore, not only it will have to reduce the rate of private debt accumulation but actually diminish the real amounts of private debt people have.
That means paying off people’s debt (and dissuading them from taking on any more) to boost their disposable income. This would open the door for a more measured level of consumption and consequently a healthier economy landscape. If that sounds like a flight of fancy, it’s worth bearing in mind that it’s only in relatively recent years that this kind of solution has refused to be considered. In the past it has been a regular occurrence and even since the GFC it has happened in Croatia and Singapore. In these times of globalisation, such a policy may not prevent all of the knockon effects of anther global economic meltdown – which I see as likely to happen if the majority of wealthy countries’ governments continue on their current economic policy path. What my suggestions would do, though, is provide some form of economic firewall to Canadians, while the rest of the world is in meltdown. That would no only provide protection but also opportunity.
Paul Gambles, co-founder of MBMG Group MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536 e-mail: info@mbmg-group.com Linkedin: MBMG Group Twitter: @MBMGIntl Facebook: /MBMGGroup
Please Note: While every effort has been made to ensure that the information contained herein is correct, I cannot be held responsible for any errors that may occur. My views may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.