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Analysis
Canada leads developed economies

Canada leads developed economies

High household debt raises doubts

by David Smith in Toronto

Tue 11 Jul 2017

This month Canada is celebrating its 150th anniversary. Apart from the parades, concerts and fireworks, the country can enjoy news suggesting it is the fastest-growing developed economy.

On the eve of Canada Day, 1 July, the government agency Statistics Canada reported growth for the sixth consecutive month, contributing to the economy's 3.3% expansion in the last 12 months. This is the fastest pace registered since June 2014, leading one senior International Monetary Fund economist visiting for the celebrations to remark: 'This is now a very robust rebound, very impressive, and quite a message to take to the G20 this month.'

Strong growth data presage an expected rise in interest rates from the Bank of Canada tomorrow, 12 July. 'There's nothing in these latest figures to make the Bank think even twice about slowing the stimulus, by raising rates, from 0.5%,' according to one banker. 'They need to do it immediately.' It would be the first such rise since September 2010 when Mark Carney, now governor of the Bank of England, ran the Canadian central bank.

The growth was spread across a range of sectors, led by mining but seen as well in wholesale goods, retail and resources. Oil and gas remained in negative territory, with output falling by 0.8% after a major industrial fire at the Syncrude oil sands facility in March.

'But with oil stabilising now at $50 a barrel, we are well on the way to recovery from the oil shock of the past 18 months,' according to one leading Canadian banker. 'Look at the unemployment numbers, down to 6.5%, the lowest since the 2008 collapse that sent us into such paralysis.' The Canadian dollar has rallied over the last few weeks and business investment has surged, up more than 12% in the first quarter on a seasonally-adjusted basis.

'All this shows our economy expanding at a pace well above any other major industrialised economy, three times as fast as the US in the first quarter of this year,' remarked an economic adviser to Prime Minister Justin Trudeau, barely concealing his delight at Canada's progress in the face of anaemic US performance. 'Quietly, we are making good again, after underperforming during the oil shock.'

The major obstacle, still, is Canada's high level of personal, credit-fuelled debt. This was spawned, in great part, by a surge in house prices in recent years. The rise was especially prevalent in Ontario and British Columbia.

Both regions are leading the way with semi-emergency measures to cool the market. They are introducing new taxes on foreign buyers of homes, rent controls, and stricter rules to curb tax avoidance on rented properties, alongside legislation to prevent instant 'flipping' (selling quickly) of houses and apartments.

'Nevertheless, Canada's credit binge makes it unlikely that the first quarter growth can be maintained,' to quote one Conservative member of parliament critical of the government's regulatory measures. 'Wait to see the picture at year's end. Household debt remains the concern.'

In a country often sceptical of its future, some doubting economists remain. 'The property market is not the long-term, stable engine of growth we need,' said one former government economist. 'Watch for a headwind in the second half of this year as the property market slows, or corrects, and the consumer cuts back.'

David Smith is a Member of the OMFIF Advisory Board and represented the United Nations Secretary-General in the Americas between 2004-14.

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