Canadian Economy in 2024

[Xerxes]

INSIDE THE MARKET

David Rosenberg: Canada is in economic decay. Prepare for BoC rate cuts and big returns in this asset class

 

There may be lies, damned lies, and statistics as Mark Twain posited. But statistics, as flawed as they may be, are all we have to go by. And the statistics show a Canadian economy that very likely has already slipped into a recession, even as Tiff Macklem doth protest too much.

 

The Bank of Canada will be singing like a canary within the next several months. The recession here promises to come earlier and be far more severe than what we will see unfold south of the border — that won’t be a pretty picture, either — with negative implications for the loonie, but highly positive implications for the long end of the government of Canada bond market as inflation completely melts away by the time spring arrives.

Spring refers to the seasonal weather pattern, not the economy, which is going to be feeling a chill for most of 2024 — even as the snow begins to melt, the pace of activity will still be melting.

 

But an even more deeply rooted problem is that we have had a government that caused the economy to become addicted to debt and excessive house price inflation, and papered over these problems by promoting an immigration boom. But the issue with the unprecedented population growth is that it isn’t paying for itself (quite the opposite).

 

That is my opinion.

 

But now, let’s assess the facts: The Canadian yield curve has been inverted since July 2022, and only four other times in recorded history has it been as inverted as it is today. Except for the summer of 1962, every inversion has touched off a recession. But when the negative gap between longer-term bond yields and rates at the front end of the GoC curve was as steep as it is now, the Canadian economy entered a recession 100% of the time. Why are the Canadian banks tightening their credit guidelines and boosting their loan loss provisioning of late? Because they are being forward-looking and see things unfolding just as I do.

 

Economic decay is already underway. Real GDP growth in Canada has slowed markedly on a four-quarter trailing trend basis from a hot +4% pace a year ago to a chilly +0.5% as of the third quarter, as fiscal stimulus lags fade away and the bite from the radical tightening in monetary policy lingers on. This is a stall-speed economy and is either in recession or rapidly approaching one. When you adjust for the immigration-fueled +2.7% population boom, what this means is that the economy, in real per-capita terms, has contracted -2.2% over the past four quarters. You can only camouflage the dismal economic reality via unprecedented inbound migration flows for so long.

 

Putting this dismal economic situation into its proper context, Canadian GDP growth, given this population boom, “should be” expanding at over a +4% pace. But it isn’t — it is as flat as a beavertail. Statistics Canada estimates that Q3 real GDP contracted at a -1.1% annual rate which offset most of the tepid +1.4% uptick in the second quarter. Tack on the fact that industrial production has been flat or negative in each of the past four months, and in five of the past six, and the year-over-year pace has been slashed to -1.3% from +5.4% a year ago. That is a massive swing in a deeply cyclical part of the economy.

 

Even the once-hot service sector has cooled off in dramatic fashion: the year-over-year trend here was clipped to +1.6% as of September, about half the +3.1% year-ago trajectory.

The buildup of recessionary pressures is unmistakable, and yet the Bank of Canada seems to be whistling past the graveyard. Only the bond market seems to have figured it out, but what else is new?

 

Real Gross Domestic Income (GDI), meanwhile, paints an even darker picture. This metric of economic activity has contracted in four of the past five quarters and is down nearly -1% on a year-over-basis, even with the population bulge. This metric tells us that there is an 80% chance the recession that no Bay Street economist sees has already begun! I hate to break the news to the Bank of Canada, but I am sure it is aware of this fact even if it won’t address it publicly. More important to Tiff Macklem & Company is fighting yesterday’s inflation battle. Plus ça change, plus c’est la même chose. Disciples of John Crow, for those with long enough memories of how things looked back in the early 1990s.

 

The fallout from the gap between population growth and the real economy is visibly seen in the woeful productivity performance, which definitely is in a recession of its own. After years of inept government policy that fueled a housing and consumer debt boom instead of nurturing expansion in the private sector capital stock, we are left with productivity declining for five consecutive quarters and down -1.7% from year-ago levels. If I were Pierre Poilievre (very likely the country’s next prime minister), I would try and teach Canadian voters in the coming campaign trail how critical it is to promote policies that enhance productivity growth — the critical ingredient for any country’s long-run growth potential and vitality. Instead, Canada has focused its supply-side policies on massive immigration which has been largely responsible for the housing shortage and affordability crisis the country now confronts. Having been around the track for a while, I don’t think it would be a stretch to declare that we have not seen a government in Ottawa understand the basic economic concept otherwise known as “capital deepening” and the link to multi-factor productivity growth since the excellent Brian Mulroney-Michael Wilson tag team in the second half of the 1980s.

Instead of promoting productivity and capital investment, the Canadian government for years, if not decades, has pursued policies aimed at spurring a housing and credit bubble of epic proportions, and now it is time to pay the piper. Household debt relative to disposable income has mushroomed to 172% — that is about 30 percentage points higher than the epic credit bubble peak in 2006-07 in the U.S. that brought the house down (both literally and figuratively). Remember — this is an aggregate statistic. The number is even higher when you consider that nearly one-third of Canadian households are debt-free — for the other two-thirds, a dire situation has taken hold. Delinquency rates are on the rise and the banks are now being forced to bolster their loan loss reserve provisioning in anticipation of a recessionary default cycle.
 

We have reached the point where nearly 15 cents of every after-tax dollar are being drained from household pocketbooks to service the mountain of debt — right where this ratio was prior to the 2001 and 2008 economic downturns. In fact, the total debt-service ratio for the personal sector is higher now than it was in the spring of 1990 when it was 12.7% — Canada was in the midst of a horrible recession back then. But what is key is that the BoC policy rate was 13% at a time when the household debt ratio, at 89%, was about half of today’s disturbing level. Today, we have a 5% interest rate doing the damage a 13% interest rate used to unleash because of the fact that the debt has ballooned as much as it has.

This debt bubble is now set to unwind, and likely not in a very orderly fashion. And the property bubble is already being burst —the YoY trend in the new house price index moving from +11.5% two years ago to +5% a year back to nearly -1% currently. There is so much air underneath the residential real estate market that just to mean-revert the homeowner affordability ratio would require a 20% plunge in home prices — and that is a conservative estimate.

The deflation underway on the largest component of both household and banking sector balance sheets promises to be spectacular — as the peak impact of the damage the BoC has unleashed still lies ahead of us. This is by no means an exaggeration and is only problematic for those who aren’t prepared.

 

What promises to make the situation more acute is that as unemployment rises, we can expect nominal wage growth to slow — the denominator in that debt/income quotient. We already are seeing the early signs of a contraction in credit, evident in the fact that the growth in total household debt and residential mortgages has slowed in the past year to +3% (negative in real terms). This is the weakest trend in two decades, if not more. There is absolutely nothing inflationary about the declining trajectory we are seeing in both money and credit — in fact, I sense that this time next year we will be back to talking about deflation and the BoC will be singing like a canary as most, if not all, of the rate hikes since the spring of 2022 is unwound. Seriously, what is there in theory or practice that leads to anything but disinflation (or even deflation) from these sharp downtrends in both money and credit? Is the central bank even aware of what its own data are revealing?

 

Now what about the labour market? While job growth has continued to this very day, the fact of the matter is that Canadians, now facing the end to Covid-era fiscal goodies and a rising debt-servicing burden, are coming back into the labour force in droves. The labour force has expanded at a +3.3% annual rate over the six months to November, well above the +2% pace of job creation (though the overall expansion in labour input is far lower than that, seeing as the workweek has been cut -0.4%). What this has done is trigger a huge +147,000 run-up in the ranks of the unemployed, one of the biggest increases in joblessness over a six-month interval since September 2020. The YoY trend in unemployment is at over +16% and, like the inverted shape of the yield curve, is another sure-fire recessionary signpost. The widening differential between the number of folks re-entering the labor market in search of a job and the actual number of positions being absorbed has precipitated a notable rise in the unemployment rate to 5.8% from the cycle low of 4.9%. While some may claim that 5.8% is still a “low number,” what matters most is the change, not the level. Not once in the past seven decades has Canada escaped a recession (NBER-defined downturn, with no intended disrespect to the C.D. Howe Institute) with a 0.9 percentage point increase in the jobless rate from the cycle trough.

 

The Bank of Canada has unleashed a whole whack load of pain on the Canadian economy and, so far, has shown no sign of reversing course. Never mind that once shelter is removed from the CPI data, particularly the bizarre inclusion of mortgage interest costs (+31% YoY), the inflation rate is sitting below target at +1.9%. This time last year, this underlying inflation rate was hovering just below +7%. Before Covid struck, back in February 2020, that inflation rate was +2.1%. It is now running below that mark!

 

The unemployment rate back in February 2020 was 5.7% and now it is 5.8%. And yet, despite the jobless rate being higher, and the lower underlying inflation rate, the policy rate today sits at 5.0% whereas it was 1.75% back then. And the 10-year government of Canada yield was sitting at half of today’s 3.5% level — hence our continued bullish stance on the bond market.

 

A bull-steepener - when the short-end of the yield curve falls faster than the long-end - is the theme for 2024, with the greatest total return potential at the long end of the GoC curve.

David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
 

 

 

 

 

Edited December 10, 2023 by Xerxes

[John Hjorth]

@Xerxes,

 

Isen't this just fear mongering? What's you own opinion about Mr. Rosenbergs scribbles?

[Jaygo]

Bravo Rosie. Except on economist productivity readings.

 

Canada's economy will never have the productivity rates of the USA and comparing the two is stupid. Canadian people as in individuals are most likely equally or even more productive simply because we are less obese (sorry)

But for our economy as a whole the numbers will show less productivity. It is nearly impossible for the whole place to freeze over and remain in static productivity vs our friends to the south where half their landmass remains relatively unscathed by cold. 

 

On the rest of his ramblings id have to agree, the economy is hurting because interest payments and the prospective of higher payments is taking a lot of juice out of consumers. Lets not forget that the long depression of 1873 ( railroads, excessive immigration and real estate) and great depression (stocks and real estate) were caused by a debt fuelled asset booms and subsequent government intervention causing bust. Ouch

 

Id wager that our dollar will crater to the lowest valuation ever in the next couple of years and canada will be the best place for Americans to invest without a doubt for the second half of the 20's, it probably already is but there will be bumps a plenty. If i was an American I would be studying the top 20 or 30 names to be prepared for a bargain basket. ill toss some names for those interested.

 

There are lots of high quality midcap names that are very dynamic. The Kitchener, Cambridge, Waterloo area of the GTA and Ottawa to Montreal corridor is nurturing some incredible small companies especially in the smart industrial space and tech. 

 

The bond proxies like banks, utes and telcos are all very good as well due to the oligopolies that exist but since the dividends make up a lot of the total return and  is not tax efficient for Americans they are probably less favorable. 

 

Equitable bank

BRP 

Richelieu

GFL

Opentext, CGI, CSU

Linemar, magna, ATS

Smartcentres, Granite Reit, MEQ, MRG

Thomson Reuters

BN and colliers

Terravest, Exchange income corp, 

transforce, 

Gildan Activewear

Wajax and toromont

 

There are many others but these are all pretty reliable and could be spectacular if we have a stock slump combined with currency appreciation.

 

[longlake95]

1 hour ago, Jaygo said:

Bravo Rosie. Except on economist productivity readings.

 

Canada's economy will never have the productivity rates of the USA and comparing the two is stupid. Canadian people as in individuals are most likely equally or even more productive simply because we are less obese (sorry)

But for our economy as a whole the numbers will show less productivity. It is nearly impossible for the whole place to freeze over and remain in static productivity vs our friends to the south where half their landmass remains relatively unscathed by cold. 

 

On the rest of his ramblings id have to agree, the economy is hurting because interest payments and the prospective of higher payments is taking a lot of juice out of consumers. Lets not forget that the long depression of 1873 ( railroads, excessive immigration and real estate) and great depression (stocks and real estate) were caused by a debt fuelled asset booms and subsequent government intervention causing bust. Ouch

 

Id wager that our dollar will crater to the lowest valuation ever in the next couple of years and canada will be the best place for Americans to invest without a doubt for the second half of the 20's, it probably already is but there will be bumps a plenty. If i was an American I would be studying the top 20 or 30 names to be prepared for a bargain basket. ill toss some names for those interested.

 

There are lots of high quality midcap names that are very dynamic. The Kitchener, Cambridge, Waterloo area of the GTA and Ottawa to Montreal corridor is nurturing some incredible small companies especially in the smart industrial space and tech. 

 

The bond proxies like banks, utes and telcos are all very good as well due to the oligopolies that exist but since the dividends make up a lot of the total return and  is not tax efficient for Americans they are probably less favorable. 

 

Equitable bank

BRP 

Richelieu

GFL

Opentext, CGI, CSU

Linemar, magna, ATS

Smartcentres, Granite Reit, MEQ, MRG

Thomson Reuters

BN and colliers

Terravest, Exchange income corp, 

transforce, 

Gildan Activewear

Wajax and toromont

 

There are many others but these are all pretty reliable and could be spectacular if we have a stock slump combined with currency appreciation.

 

I think you’re on to something. Or it’s my confirmation bias coming through…

Nice list, I own 4 of those…

I’d add SJ and the Canadian rails to the list. Even Couche Tard. 

Edited December 10, 2023 by longlake95

[bizaro86]

1 hour ago, longlake95 said:

I think you’re on to something. Or it’s my confirmation bias coming through…

Nice list, I own 4 of those…

I’d add SJ and the Canadian rails to the list. Even Couche Tard. 

 

If you think the Canadian economy/dollar/stock market is going to tank Couche Tarde is a great choice to watch, imo. If it dropped with the market/canadian dollar, there's no reason to think it's (mostly international) business would be affected. 

[Viking]

I think much will depend on who is elected Federally in 18 months. The Liberals, currently in power, have not governed like traditional Liberal party (center) - instead, they have governed more like an NDP party would if it was in power. I don’t think this is just because of its coalition with the NDP. Canada has been moving hard left. Not just in terms of government policy. But also in terms of economic philosophy: we are being taught daily by Federal politicians (and some provincial) that businesses and entrepreneurs are the devil  (if they are successful they must be exploiting someone) and, of course, more government is the answer. Business simply exists to pay taxes. Government exists to make your life better. It is also clear that on many important issues the policies of Federal Liberal party have been taken over by far left policy groups (they are smart bastards and they have finally figured out how to get what they want).

 

If the political pendulum in Canada continues to swing left my guess is more businesses will chose to set up shop in the US. That will not be good for Canada in the near term. My guess is the next Federal election in Canada will be quite important in determining the trajectory of the economy over the next 10 years. More so than most elections. 
 

Regardless, Canada will get through this trying period. Being such a resource rich country means you can do lots of dumb things and still do ok. 

Edited December 10, 2023 by Viking

[SharperDingaan]

What the BoC intends has been quite obvious and for quite some time; the chattering class just chose to deny it until they saw it - which is now. We have been successfully rolling into Province of Newfoundland debt for a while now, in anticipation of the coming decline.

 

The BoC intends a short, sharp downtick of negative growth; at worst, maybe a technical recession of two quarters of negative growth. Negative growth and layoffs dropping inflation like a brick, immigration picking up much of the minimum wage work that still has to be done.  Many of the laid off also retiring to the CPP/OAS/GIS, and RRSP/RRIF/Pension income much less exposed to the availability of ongoing work.   

 

Lower the yield curve by 150bp and everything looks very different. The TMP expansion will also be delivering, and an additional 300,000 boe/d at USD 70 will help out the Balance of Payments in a big way. Debt gets termed out, toxic ministers shuffled out of portfolios, and the spotlight refocuses on good governance.

 

The chattering class also assumes ‘business as usual’. When we know there is a Canadian CBDC in the wings, the BoC has floated components of it for comment, and the US is progressing on BTC-spot ETF’s as a mainstream product. Canada already has BTC-spot ETF’s, as well as the related option market, and has had them for some time; all with no ill effect.

 

Question is:  do you make more on a bond-fund rising as the yield curve declines, or on the BTC-spot ETF as/when the next halving does its thing, and/or a US BTC-spot ETF gets approved? The surer $50, or the less sure but $700+ if the stars align?

 

SD

[Xerxes]

On 12/10/2023 at 9:23 AM, John Hjorth said:

@Xerxes,

 

Isen't this just fear mongering? What's you own opinion about Mr. Rosenbergs scribbles?

Hi John

 

For me, it is very simple. Canadian mortgages have 5-year terms. That is the “transmission mechanism” that transfers higher rate pain to the real economy and impact consumer behaviour. 
 

I have two tranches of mortgages on my house. (Both of equal dollar amount; not big amount). One of them is set 3.1% expiring next April. The other set at 1.7% expiring late 25, early 2026.
 

I expect to travel less in 2024 than in 2023, but travel I will. 

In the US with their very long montage terms of decades that “transmission mechanism” doesn’t work that well. 
 

All this boils down to Canadian consumers being bowed faster than their American counterparts. 
 

And that in turn translates to fed fund rate heading lower faster in Canada than in US. I think. 
 

However, things never happen in isolation and in a linear fashion. A gapping FX rate between CAD and USD caused by rate in Canada doing down faster than US should mean more expensive imports from US to Canada. 
 

Therefore, even as Canadian central bank cuts rate, we (Canada) might be importing inflation from US through higher imports. Which in turn would be put our central bank in a tight spot. 
 

We would be beholden to the Federal Reserve. 
 

Ps: unrelated I have heard some months ago (on The Economist I think) that Danish mortgages are like the American mortgages with their very long terms. The difference however is that homeowners can buyback their discounted mortgage, should they wish, when rate goes up. If this is true, than that is what US needs. An escape valve so that homeowners can realized the value of them shorting the mortgage market, and thus be able to be free and move, if they wish.  

 

[John Hjorth]

@Xerxes,

 

Partly on topic, partly off topic: Thank you for sharing your view on things.

 

- - - o 0 o - - -

 

About the Danish mortgage model : Yes, You've understood the Danish mortgage model correctly.

 

FinansDanmark : The traditional Danish mortgage model [also attached].

 

FinansDanmark - den-klassiske-realkreditmodel_uk_2021_final - 20231214.pdf

Edited December 14, 2023 by John Hjorth