Canada: Debalancing, Non Rebalancing

The Canadian Labour Force Survey is noisy month-to-month, but the trends inwards the information signal towards a debalancing, non a rebalancing, of the Canadian economy. This poses an needlelike employment for policymakers; their working supposition is that the economic scheme would cut back its dependence upon consumer-debt fueled increase every bit the line concern sector recovered from the fiscal crisis. Unfortunately, the consumer-facing sectors are the most labour intensive sectors, too they stay the driver for project creation.


Canada is currently stuck inwards an "equilibrium" of sluggish growth, alongside the housing marketplace losing upward momentum, but structure levels remaining at unsustainably high levels. There is a opportunity that the economic scheme volition autumn into a "bad equilibrium", alongside the consumer sector retrenching (as happened inwards the United States), but at that spot is no obvious way to gauge when such a switch of equilibrium mightiness occur. This considerable doubtfulness poses obvious problems for equity investors, given that equities react violently to the previous quarter's earnings. Being likewise forward-looking poses likewise much career risk. However, the Government of Canada bond plication poses interesting opportunity characteristics versus other developed markets - at that spot is a gradual renormalisation of rates priced into the curve, but the economic scheme is showing piffling sign of acceleration.

Although Construction roughshod inwards Oct 2013, it all the same remains ane of the larger drivers of project creation over the previous twelvemonth (October 2012 - Oct 2013). In fact, if nosotros await at the most "consumer-facing" sectors, nosotros see  the next annual project increase (figures are annual changes for the seasonally adjusted series):

• Accommodation too nutrient services (+77.8k),
• Construction (+66.4k),
• Retail & Wholesale Trade (+47.9k),
• Finance, insurance, existent estate too leasing (+17.9k).

 The full contribution of these sectors was 210,000 jobs concluding year, which is close the same every bit the full project increase inwards Canada (+213,800 jobs). In other words, all the other sectors netted out to range unopen to no jobs. Manufacturing, which was hoped to croak an engine of growth, lost 82,000 jobs over that period. If the repose of the economic scheme cannot range jobs when the economic scheme is expanding, it is difficult to hold upwards optimistic every bit to what volition come about when structure jobs offset disappearing.

The nautical chart higher upwards shows how the economic scheme has debalanced over time. Construction too finance rode a bubble inwards the early on 1990's, retrenched, but their shares of the full accept over again returned to extreme levels. Manufacturing jobs accept dropped inwards importance over the decades; too this has non been affected past times the recent cycle.

Finally, the bottom panel underlines a key potential origin of opportunity inwards the Canadian fiscal system. The Canadian provinces are at the front end line inwards terms of providing welfare country services, such every bit teaching too health. The secular rising of wellness attention demands (due to an aging population) agency that this spending keeps rising inwards importance inwards provincial budgets. However, the provinces lack instantly access to the fundamental bank, too are thus analogous to countries inwards the eurozone. Influenza A virus subtype H5N1 sustained downturn volition position immense describe per unit of measurement area on their budgets. Although policymakers are unlikely to repeat the mistake of the Great Depression (the Federal authorities allow the province of Alberta default), politically-motivated austerity campaigns stay a possibility. Such a policy disceptation would hateful that the recovery from the side past times side recession would hold upwards extremely slow.

(c) Brian Romanchuk 2013