Canada is struggling to maintain economic momentum now that the key drivers of the recovery (household consumption, residential investment and exports) are turning lower.
• The household sector is overextended with debt-to-income levels near historical highs
• Confidence among corporates is low as demonstrated by languishing capital expenditures
• Labor productivity growth has been consistently poor for the past decade
• Canadian dollar strength presents a meaningful obstacle to strong export growth as illustrated by Canada’s deteriorating balance of payments
To make matter worse, the Canadian real-estate market appears to be overextended, with prices and construction activity divorced from the underlying fundamentals.
The road ahead for Canada is choppy. Low inflation and retreating domestic demand make easier monetary policy appropriate in most situations. A booming real-estate market, however, makes further accommodation unlikely. At this point, Canada’s only option is to be patient and wait.
Please review our Dashboard – Canada in which we analyze the recent economic trends in Canada and their impact on broader activity: Dashboard – Canada (Summer 2013)