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The Government Is Right: Canada Is in Trouble

On November 1, Statistics Canada revealed that Canadian economic growth continues to slow. August GDP growth came in at 0.2%, while July’s growth was revised lower to 0.4% from its previously reported figure of 0.5%.

According to BNN, “The oil-oriented Canadian economy has struggled to gain sustainable momentum since it was hit by a drop in crude prices last year. Growth is seen cooling to 1.5% in the final quarter of the year.”

You should be worried

The recent data is yet another headwind for an increasingly worried Canadian government.

Recently, the Bank of Canada held rates steady at 0.5%, while cutting its GDP forecast to 1.1% in 2016 and 2% in 2017. The chief concerns were sluggish exports, slowing real estate markets, and nervousness about the U.S. election.

It now believes that the Canadian economy won’t reach full capacity until mid-2018. “Recent export data are improving but are not strong enough to make up for ground lost during the first half of 2016,” it said, adding there is now “heightened uncertainty” surrounding the Canadian economy.

According to Derek Holt, an analyst with Bank of Nova Scotia  (TSX:BNS)(NYSE:BNS), August’s numbers continue to show a weak Canada. That weakness should continue to make the government cautious about the future.

“(The Bank of Canada) will take it with a bit of a cautious optimism slant to it, but there are enough red flags in terms of the underlying details to reaffirm their cautious stance of late,” he said.

Don’t expect things to turn around quickly

David McKay, the CEO of Royal Bank of Canada (TSX:RY)(NYSE:RY), is cautious about the health of the Canadian economy. He believes the country could take 15 years to “reinvent itself” after its manufacturing and service sectors began to shrink following the 2009 financial crash. Many of the jobs that were lost in that period simply aren’t coming back.

“So the economy has had to reinvent itself: create new customers and new markets with new products and new manufacturing capability,” he said. “That takes time. That can take a decade; that can take 15 years.”

There are three factors that will continue to pressure the economy.

A weak loonie

The U.S. continues to raise rates, while the Canadian government lowers them. While Canada cut rates twice earlier this year, the U.S. raised rates to 0.5% last December and is looking to raise them again. This will keep a tight lid on the value of the loonie versus the U.S. dollar.

A housing crash

Canadian Real Estate Association recently trimmed its forecast for 2017, projecting a 0.6% decline in national home sales and a 0.2% drop in prices. In June it had forecast sales to rise 0.2% and for prices to rise 0.1%. It looks like the best days for the Canadian real estate market are over.

Oil will lose momentum

North American shale production costs are consistently lower than the market expects. At US$50 oil, expect supply to come back online to slow the momentum of rising prices.

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Fool contributor Ryan Vanzo has no position in any stocks mentioned.

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