Canada looks a little bearish

Justin Trudeau, with his “sunny ways” political theme, has gained international attention, embracing Syrian refugees, making a high-profile visit to the White House and talking tough on climate change at the Paris summit. But Canada’s 23rd prime minister (the son of the 15th, Pierre Trudeau) is still surrounded by dark clouds hovering back home.

Mr Trudeau’s middle-of-the-road Liberal government is set to table its first budget tomorrow and the biggest question Canadians have is just how deep into debt the government will go to stimulate a lacklustre economy. Similar to the UAE and other oil-dependent nations, Canada’s economic growth has been sidetracked by the dramatic drop in global crude prices to about US$40 per barrel from more than US$100 two years ago.

The Liberals were criticised during last autumn’s election campaign for promising to run deficits of up to C$10 billion (Dh28.22bn) a year over the next three years to cope with the economic downturn, instead of trying to balance the country’s books. They campaigned on a plan to pour money into job-creating infrastructure projects such as roads, buildings and bridges.

In the weeks leading up to budget day, Mr. Trudeau has said balancing the books by 2019 could be “difficult,” and some economists predict the 2016-17 budget deficit alone could reach C$30bn or more. The previous Conservative government had forecast a C$2.4bn budget surplus for the current fiscal year, which the new government said in November was more likely to be a C$3bn deficit because of the hit on the economy from the oil price plunge.

“I think it’s disappointing that this whole notion of being able to balance the budget in a reasonable period of time, over three or four years’ time, has completely gone out the window,” says Patricia Croft, an independent economic analyst and former chief economist at RBC Global Asset Management. “The risk is that we become comfortable running large deficits on a continuous basis.”

The other worry is that economic stimulus from infrastructure programmes takes time to work. Promises to pour more concrete and steel might not be enough to boost the economy in the near term.

The present need is clear.

Amid the rout in oil prices, the Canadian economy fell into recession in the first and second quarters of last year, eking out a 1.2 per cent gain for all of 2015. Canada’s oil sector has lost C$55.3bn in revenue from lower oil exports since crude started falling in the second quarter of 2014. The country’s jobless rate is now at 7.3 per cent, its highest level in three years, as weak oil prices hammer resource-rich provinces such as Alberta, Saskatchewan and Newfoundland and Labrador.

Looking ahead, the IMF is forecasting that Canada’s economy will grow just 1.7 per cent this year and 2.1 per cent next year.

Canadians as a whole are carrying record debt loads thanks to low interest rates and soaring house prices, particularly in Tor­onto and Vancouver. Can­adian households held more than C$1.65 in debt for every dollar of annual disposable income at the end of last year, according to Statistics Canada, the government agency that collects the country’s eco­nomic data. Household debt rose 4.9 per cent to a record C$1.9 trillion, the fastest rate in four years, while disposable income grew just 3 per cent.

Economists are warning of the pain that could come when interest rates eventually rise – although right now that looks a long way off. The Bank of Can­ada, the country’s central bank, recently stuck with its 0.5 per cent overnight rate, waiting to see what plans Mr Trudeau’s government has in the budget to stimulate the economy.

Mr Trudeau’s political honeymoon could quickly come to an end when tax increases – aimed at the country’s wealthiest citizens – and spending cuts inevitably come. The country’s best hope for a comeback just now is a meaningful recovery in oil prices, which few are forecasting will happen any time soon. Meanwhile, experts believe the government needs to act swiftly on its promise to diversify Canada’s economy away from resources, particularly as the world works aggressively to reduce its reliance on fossil fuels.

“We have a new government at a very interesting time,” says Ms Croft. “I think Canada is on the brink of disruptive change. Potentially low commo­dity prices are the new normal and the world is transitioning to a low-carbon economy. What does that mean for a resource-based economy such as Canada?”

Boom to bust in Alberta

The evidence is starkest in Alberta, an oil-rich province once considered the promised land for workers from across the country, and the world, seeking six-figure salaries in towns and cities characterised by the cliché of cowboy boots and dusty pickup trucks.

Even some servers in restaurants boasted of earning more than C$100,000 annually in oil-boom towns such as Fort McMurray, in northern Alberta. Those days are gone as workers pack up and leave, many heading back to where they came before lofty oil prices lined their pockets. According to Statistics Canada, more people left Alberta than moved to the province in the fourth quarter, for the first time since 2010. Alberta’s unemployment rate hit 7.9 per cent last month, up 2.5 percentage points from a year earlier.

The exodus is hurting a wide range of businesses and has even taken its toll on Alberta’s biggest annual event, The Calgary Stampede. The recent Calgary Stampede Canvas Auction, where advertisers bid to put their logos on chuckwagons, brought in C$2.3 million, down about 20 per cent from last year and more than 40 per cent off from a record of just over C$4m in 2012.

Suddenly cash-strapped, Alberta is turning to the federal government for assistance after doing “a lot of heavy lifting” for the country for many years, according to its premier, Rachel Notley. Her left-leaning New Democratic Party government was elected in May last year after nearly 44 years of right-wing Progressive Conservative party rule.

Mr Trudeau has announced a plan to fast-track C$700m in spending to jump-start economic activity in the province, but Albertans will be looking for more help in this week’s budget.

Many Canadians are unsympathetic with the current plight in Alberta after years of watching the province bask in its oil-industry riches.

The east-west divide is likely to be a consideration when the federal government decides how to distribute what money it has. The government is also under pressure to help other provinces and even com­panies, including struggling Quebec-based Bombardier. The jet maker has landed a C$1bn investment from the Quebec government and is now looking for money from the federal government to protect thousands of well-paying jobs.

It is one item on a long and growing list of investments the government is being asked to make across the country to keep the economy from slipping back into a recession.

It’s not all bad

There are some rays of sun poking through the clouds. Lower energy prices have caused Canada’s currency to depreciate against the US dollar. The Canadian dollar, also known as the loonie (named after the bird), is worth about 76 US cents today, a level that is making Canadian exports more attractive and luring additional tourists to the country. It is also forcing more Canadians to skip their annual sun-soaked winter holidays down south, and settle for the colder temperatures at home.

According to Statistics Canada data, Canadians made 20.7 per cent fewer trips to the US in December last year than they did in December 2014. Americans, meanwhile, made nearly 12 per cent more trips to Canada in the same period.

British Columbia’s world-renowned Whistler Blackcomb ski resort, a venue at the 2010 Winter Olympics, reported more than 1.14 million visitors in the first five weeks of the year from Canada and abroad, which it says is the highest year-to-date number in the resort’s history.

Another sector showing much-needed signs of life is manufacturing, where shipments rose a healthy 2.4 per cent in January from the month before, and about 10 per cent between November and Jan­uary, to their highest value since July 2008.

“It’s not all bad news for Canada’s economy,” says Matthew Stewart, the associate director of economics at the Conference Board of Canada think tank. He points to growth in more economically diverse provinces such as British Columbia, Ontario and Quebec. “2016 will still be a difficult year, but better than last year as the non-energy side of the economy sees more of a pickup.”

Housing is the wild card. The market varies greatly from coast to coast and even between cities in the same province. Sales and prices in Toronto and Vancouver, the country’s first and third-largest cities, respectively, are skyrocketing, yet dropping in oil-dependent cities such as Calgary and Edmonton.

Overall, the average house price across Canada surpassed half a million dollars for the first time last moth, to C$503,057, up 16.4 per cent from a year earlier. That is also a 60 per cent increase from 2008, when market bears began “howling” of a bubble in the Canadian market, says the Bank of Montreal chief economist Douglas Porter. Without Toronto and Vancouver, the average house price in Canada was a more modest C$355,235, up 8.7 per cent from a year ago, according to the Canadian Real Estate Association.

“We’ve run out of adjectives to describe Vancouver. To me it’s out of control,” says Mr Porter of the most expensive city for housing. The average price of a home in Metro Vancouver was C$795,500 last month, up 22 per cent from a year ago.

“Toronto is dangerously moving in that direction,” Mr. Porter adds, “but it’s not in the same league as Vancouver. I am concerned both are at risk at turning into a bubble, if Vancouver isn’t already there.”

Investors looking for long-term, stable returns may not want to put their money into the country’s housing right now, but experts say a bet on Canada’s overall economy could pay off. More money managers have been going on BNN, the country’s all-business TV channel, announcing they are slowly starting to move funds back in the country from the United States.

“If you’re looking well down the road, I think Canada still has a very sound economy and a lot of things going for it, which I think will show through in years ahead,” Mr Porter says.

If Mr Trudeau hopes to sustain his sunny ways, the sooner that investment starts pouring in, the better for the country’s still-gloomy economy.

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