Canada is in the midst of one of its weakest expansions ever, and only the housing boomkeeps it from getting worse.
That’s one of the key takeaways from Friday’s GDP report. Two years since oil prices started plunging, Canada’s economy is almost completely reliant for growth on bank lending and the hot Vancouver and Toronto housing markets.
Real estate and financial services now account for 20 percent of the economy, levels not seen in the data since the early 1960s. That could be a problem, with household debt at a record and policy makers scrambling to slow price gains that are making homes unaffordable for all but the wealthiest buyers.
While Bank of Canada policy makers expect a sharp second-half rebound as oil production resumes and exports pick up, some investors are hedging their bets. Swaps trading suggests an almost 30 percent chance Governor Stephen Poloz will cut interest rates by the October meeting to give the economy another jolt.
At the very least, the economy’s lethargy will add urgency to efforts by Prime Minister Justin Trudeau and Finance Minister Bill Morneau to bolster long-term growth ahead of the 2017 budget.
Based on Friday’s report, here’s what else we know about how Canadian economic output has changed over the past two years:
Since May 2014, Canada’s economy has expanded 1.2 percent. That’s the slowest two-year pace outside a recession in at least six decades, according to Statistics Canada monthly data back to the early 1960s. Until recently, the country typically mustered growth of least 5 percent over two years.
Over the past 10 months, Canada’s economy has stalled altogether with zero growth. That’s mostly due to Alberta wildfires in May shutting down oil production. But there appear to be deeper forces at play. Averaging GDP over three months in order to reduce the effect of the wildfires still produces the same result: the worst two-year expansion outside a recession in decades.
Output of mining companies, oil and gas producers and their support sectors plunged 14 percent in May from the same month two years earlier. Averaged over three months, the decline is only 9 percent. Excluding the May figures, oil production has held up relatively well in volume terms, even with the oil-price drop.
The same can’t be said for investment into new capacity. Engineering-related construction -- closely associated with oil company investments -- is down 21 percent over that time.
The decline in resource production, coupled with the fall in engineering works, has shaved about 1.7 percent off Canadian GDP in the two years through May, according to Bloomberg calculations.
One of the big economic mysteries for Canadian policy makers has been manufacturing’s recent poor performance, in spite of a weaker exchange rate. Manufacturers had their worst month in May since the recession, with factory output down 2.4 percent.
A big part of that monthly decline is temporary, led by a 13 percent drop in refinery output because of the oil-supply disruptions. But even averaging over the last three months produces just a 1 percent gain for manufacturing over two years, which is slower than the rest of the economy. Jobs data shows a similar trend; the sector has lost 30,000 jobs over the past two years.
The biggest contributor to Canadian growth since oil prices began their decline is real estate. The sector, based on a Statistics Canada measure that is largely made up of the imputed value of owning a home but also includes broker fees and other real-estate activity, was 6.8 percent larger in May from two years earlier, adding about 0.8 percent to national GDP over that period. That’s pretty much in line with growth rates over the past 15 years for a sector that even escaped the 2008-2009 recession largely unscathed. Fees for brokers are up 15 percent over that time. Real estate has become the country’s biggest industry at 12.4 percent of GDP, or 13.2 percent if you include leasing.
Another Canadian industry experiencing a boom is finance and insurance. Unlike the real estate sector however, banks have actually been accelerating their pace of growth. Output for this sector is more than 9 percent over the past 24 months.
Retailers have been making a comeback after struggling initially to build momentum from the recession, spurred by the same low interest rates driving real estate and financial services. The sector has been the third biggest contributor to growth over the past two years. In May, retail output was 6.2 percent above levels two years ago, adding around 0.3 percent to national output over that time.
While governments are still not the biggest contributors to growth, the fact they are adding to it at all marks a change. This partly reflects part Trudeau’s renewed emphasis on public spending and the federal government’s return to deficits. Public administration is up 3.1 percent over the past two years.