For the third year in a row Maclean’s asked economists, investors, analysts and financial commentators to submit what they think will be an important chart Canadians should watch in the year ahead—and they delivered, in spades. From the state of Canada’s housing market and the energy sector to government finances and how Canada will fare under Donald Trump, these 75 charts, accompanied by explanations from each contributor, will help prepare Canadians for understanding the economy in the year ahead. Here they are, in no particular order.
Enjoy!
Where’s the export recovery?
David Watt, HSBC Bank Canada.
“Export recovery! Wherefore art thou? Canadian exports are stuck in their weakest cyclical recovery in 50 years. By this stage of a recovery—eight years on from the prior cycle peak—exports are usually almost 60 per cent above the prior cycle peak. Even in weak recoveries, exports are usually up by about 30 per cent. In the current recovery, exports are just 11 per cent above the prior cycle peak. The Bank of Canada recently lowered its trajectory for export growth as it recognized that structural factors might be playing a significant role in the lacklustre recovery. Policy-makers need to give serious thought, and take significant measures to improve Canada’s export performance.”
Part-time employment driving job growth
Beata Caranci, chief economist, TD Economics
“When it came to job creation, 2016 reflected quantity over quality. From a bird’s eye view, 160,000 new jobs landed on the Canadian landscape between January and November, which was more than each of the prior three years. But, from the ground, these jobs were in part-time positions. The degree of unfavourable composition between full-time and part-time typically has not occurred outside of a recession period. The labour market embodies the growth-challenge confronting Canada, as an overweight of part-time employment will depress growth in earnings and hours worked. This is a foreboding start to 2017 if demand for full-time positions doesn’t shake out of its funk.”
Higher rates delayed
Scott Cameron, formerly of the Parliamentary Budget Officer, now with the Mediterranean Growth Initiative and Alma Economics. Twitter: @twitscotty
“This isn’t a charge against forecasters, who have little choice but to assume that the future will behave like the past (following a shock like the global financial crisis, forecasters typically return their interest rate outlooks to an estimate based on the ‘neutral rate’ that should prevail in calmer periods). And this pattern isn’t limited to Canada. Trying—and failing—to predict the path of rates has been a defining mark of the post-financial crisis experience in economies across the world.
But Canadian forecasters may soon be left alone to turn the lights off at the pity party. The U.S. Federal Open Market Committee, seeing much stronger fundamentals in America’s economic prospects, is likely to begin raising rates as early as its Dec. 13-14 meeting. As we conclude a ninth year of relentless revisions, it’s easy to question whether interest rates in Canada will ever lift off and fulfil expectations.”
Destined for slower growth
Doug Porter, Chief Economist, BMO Financial Group
“Somewhat overshadowed by the trauma of the global financial crisis and its aftermath, there was a critical demographic development unfolding across much of the industrialized world in recent years—including Canada. There was a sharp and pronounced slowdown in the growth of the core working age population. For instance, in the past five years in Canada, the population of those aged 15 to 64 years old has risen at a modest 0.5 per cent annual rate (and even a bit slower in the past year at 0.4 per cent). This compares with an annual growth rate that was incredibly stable and consistently above 1.1 per cent for the 25 years up to 2010. This marked slowdown in a key building block of the economy’s growth potential is sometimes overlooked because of a focus on the growth in the labour force population. While that measure is still rising a bit faster than one per cent per year, the gains are increasingly driven by those above the age 65 (i.e. the wave of the early Baby Boomers). If anything, this force will gather momentum over the next decade as the peak of the baby boom was hit in 1959-61, and those folks start retiring in massive numbers in the middle of the 2020s. Even a dramatic increase in immigration, as proposed in some quarters, is not going to turn this relentless tide.”
Canada’s economy is out of balance
David Wolf, portfolio manager at Fidelity Investments
“In recent years, the Canadian economy has consisted more and more of building houses and buying stuff on credit and less and less of doing things that allow us to compete now and in the future. This chart reinforces the view that rectifying the imbalance could require material further depreciation of the Canadian dollar.”
Will Alberta’s job market heal?
Trevor Tombe, assistant professor of economics, University of Calgary. Twitter:@trevortombe
“Collapsing oil prices hit Alberta hard. The past year-and-a-half has seen falling employment, rising unemployment (especially long-term), record-low consumer confidence, and a ballooning provincial deficit. Many wonder when it will end; 2017 could be the year. Various forecasts, from the Bank of Canada, the Conference Board, and more recently ATB Financial, all suggest Alberta’s recession may be over and we’ve started down the long road to recovery. The chart to watch in 2017 is of Alberta’s hopefully healing labour market.”
Canada’s tax competitiveness is in trouble
Jack Mintz, Palmer Chair of Public Policy at University of Calgary. Twitter: @jackmintz
“Canada’s effective tax rate on new investment (the Marginal Effective Tax Rate) reached its lowest point at 17.5 per cent in 2012, below the average rate in the OECD and lowest in the G7. Since 2012, Canada has been increasing its taxes on investment, reaching 20 per cent in 2015 (and 20.1 per cent in 2016), which is now higher the OECD average (it is second-lowest in the G7 after Italy). With the OECD average effective tax rate continuing to decline, the U.K. reducing its corporate income tax rate from 20 to 17 per cent in the next two years, a potential major reduction in corporate taxes in United States in the coming year, the trend in Canada is starkly opposite with potential tax hikes including the carbon tax. Tax competitiveness will likely be a significant issue in the coming year.”
Extreme housing, Canada style
David Doyle, Canadian Strategist at Macquarie Group
“Peak housing is here. The Canadian economy’s dependence on housing investment is equally as stretched relative to total output as it was in the U.S. at its peak in late 2005. Alarmingly, the breakdown of the contribution from subcomponents has also followed a similar path. Our chart shows the deviation that brokers’ commissions and other transfer costs (a subcomponent of residential investment) as a share of gross domestic product is from its long-run average. In Canada, this is now 3.25 standard deviations elevated, illustrating an even greater imbalance than existed in the United States in late 2005. The combination of i) the B.C. provincial government’s foreign buyers’ tax, ii) new regulatory tightening measures of the mortgage market, and iii) a recent rise in Canadian mortgage rates are likely to create headwinds for this measure in 2017 with potential significant negative ramifications for housing and the broader economic outlook.”
Canada needs business investment to rebound
Pierre Cléroux, chief economist, Business Development Bank of Canada. Twitter: @PierreCleroux
“The fall in oil prices has caused a notable decline in business investment over the past two years, causing a significant slowdown in the growth of Canada’s economy. Business investment must rebound if economic growth is to accelerate. In addition, businesses must invest to improve their productivity. Doing so will help them remain competitive, domestically and internationally. Improving productivity is also essential to helping Canadians maintain our standard of living, despite the slowing growth of the labour pool caused by the aging of the population. Finally, business investment is also crucial for business growth. For all these reasons, business investment should be monitored closely in 2017.”
Canada losing its edge in trade with U.S.
Jock Finlayson, executive vice-president, Business Council of B.C. Twitter: @jockfinlayson
“Canada long enjoyed the status of being the No. 1 source of American imports. No more. We were overtaken by China a decade ago, and more recently by Mexico. Since 2000, Canada has lost 5.5 points of U.S. market share. In some ways the picture is even darker, for the following reason: since 2000, Canadian oil exports to the U.S. have increased sharply. Absent oil, our share of the U.S. import market would be several percentage points lower than depicted in the chart. This highlights the worrisome erosion of Canada’s competitiveness on a North American basis, with manufacturing production and capital investment, in particular, having drained out of Canada into the southern United States and Mexico over the last 15 years. It remains to be seen whether the protectionist impulses of the new American president will alter the competitive landscape for Canada and other U.S. trading partners over the balance of the decade.”
Capital-intensive industries are underperforming
Benjamin Tal, deputy chief economist, CIBC World Markets
“While output for both labour and capital-intensive sectors in Canadian manufacturing fell dramatically during the recession, the damage to capital-intensive industries was notably larger. Those sectors recovered nicely since then, but production is still more than 10 per cent below pre-recession levels, and it is still lagging the performance of labour-intensive sectors. But by far, the largest underperformance of capital-intensive Canadian manufacturers was relative to their U.S. counterparts. For those capital-intensive American manufacturers, the mother of all recessions was nothing more than a blip. In fact, their production today is 12 per cent above pre-recession levels.
With capital-intensive manufacturing producers south of the border outperforming, and labour-intensive production roughly in line with what we have seen in Canada, U.S. labour productivity has gained relative ground over the cycle (despite recent softening)—rising by an annual average of 2.6 per cent since 2006—more than double the productivity gain seen in Canadian manufacturing. That productivity gap clearly worked to erode some of the benefits of a weaker dollar on relative Canadian unit labour costs.”
The ambition gap in Canada’s GHG emissions
David Macdonald and Hadrian Mertins-Kirkwood, Canadian Centre for Policy Alternatives. Twitter: @DavidMacCdn and @hadrianmk
“Alberta, British Columbia and Ontario showed climate leadership in 2016 with new provincial plans to reduce greenhouse gas emissions. Alberta’s commitment to phase out coal-fired electricity generation in favour of renewables is especially important. But at risk of pooh-poohing progress, we have to point out the new measures announced in these three provinces (which critics say “go too fast”) will at best flatten our GHG emission growth , not lead to an overall reduction in Canada’s GHG emissions. That’s no small feat, given expected economic and population growth through 2030, but it also isn’t enough. As this chart shows, there is a huge gap—an ambition gap—between where we are and where we need to be to meet even our modest international commitments. With the risk of catastrophic climate change on our doorstep, this is no time to go slow on deep emissions reductions. Hopefully, new federal and provincial policies in 2017 will drive down our projected GHG emissions as governments face up to the substantial changes necessary to meet our targets.”
Government net debt will continue to constrain
Michael Veall, professor, department of economics, McMaster University
“Net debt per capita of the provincial governments east of Saskatchewan is comparable to that of the federal government, as this chart by John Kealey shows. Especially in those provinces, the pressure will continue to contain expenditures on health care and education.”
Will rising bond yields trigger a hard landing in housing?
David Madani, senior Canadian economist, Capital Economics
“With the U.S. economy already operating close to full employment, Donald Trump’s fiscal stimulus plan might generate higher inflation rather than materially higher U.S. real economic growth. If this happens, inflation expectations would continue to rise sharply, reinforcing the upward trend in U.S. Treasury yields. Under these circumstances, Government of Canada bond yields would also climb higher, forcing domestic banks in Canada to pass on higher borrowing costs to the heavily indebted household sector. That would restrain household consumption growth and trigger, as we have long feared, a hard landing in the overvalued housing market.”
Housing affordability is deteriorating
Larry MacDonald, financial author. Twitter: @Larry_MacDonald
“The Bank of Canada’s Housing Affordability Index remains the indicator to watch in 2017 because if Canadians can no longer afford to own a house, it would dampen residential construction and undermine a key prop holding up the economy—not to mention possibly even endanger the financial system through rising mortgage defaults. The index, which tracks the proportion of disposable income that a representative Canadian family spends on carrying a mortgage and utilities, has indeed trended upward in recent quarters. But it remains below its long-term average, suggesting a downturn in the housing market is not imminent at the national level. Should the upward trend continue and approach the index’s peaks reached in the early 1980s and 1990s, a tumble in the housing market would be a distinct risk given how house prices cratered after those peaks occurred. “
Canada’s venture capital gap with the U.S. has widened
Mark McQueen, president and CEO, Wellington Financial. Twitter: @markrmcqueen
“If the Canadian economy is going to succeed, our country requires more early-stage risk capital. As the chart shows, Canadian entrepreneurs attract a woeful amount of venture capital as compared to their American counterparts. Despite the 2013 launch of Stephen Harper’s Venture Capital Action Plan, the per capita ratio of U.S. investment has raced ahead of our own. I’m hopeful that might start to turn around in 2017.”
Watch the U.S. dollar
Mike Newton, portfolio manager, Scotia Wealth Management. Twitter: @NewtonGroupSM
“I believe we are in the early stages of a secular bull market in the U.S. dollar which began sometime in 2014-15. I am not just talking about the oft-cited benefitting factors such the ‘fear-trade’ nor the political manoeuvres by Trump such as corporate repatriation and his fiscal stimulus policy. Beyond the justification of the interest-rate differentials, a real thematic rationale for current and future dollar strength is in play. Technically, the U.S. dollar could be setting up for a longer-term ‘breakout’ versus a basket of global currencies including the Canadian dollar. Rising rate expectations in the U.S. have caused the greenback to rally to levels not seen since the beginning of 2015. Simply put, changing the trajectory of the policy mix in the United States toward looser fiscal and tighter monetary policy is a classic setup for an appreciating currency and especially in a global sense where the rest of the world is not on that same trajectory. This strength will have a host of knock-on effects, from making oil (priced in dollars) more expensive to the rest of the world to pressuring emerging economies that have dollar-denominated debt. All of this could, over time, act as a braking mechanism on global growth, which isn’t exactly robust at the moment. As usual, the actual outcome will fall somewhere between, but investors need to keep an eye on these developments.”
Ottawa’s share of health spending
Brian Lee Crowley, managing director, Macdonald-Laurier Institute. Twitter: @brianleecrowley
“The provinces and territories claim that Ottawa’s so-called cuts to health-care transfers will force them to ‘do more with less.’ Not so. Not only have federal health-care transfers grown by half over the past decade, the current trends will see Ottawa covering nearly 40 cents of every new dollar that provincial and territorial governments put into heath care. Ottawa is doing more than its share—unless of course the provinces plan to let spending rip and want Ottawa to pick up the growing tab. What to watch for in 2017: if provinces lose control of health spending, or if Ottawa caves on unjustified provincial demands to increase federal transfers.”
Fewer oil patch workers, but at the same wages
Todd Hirsch, chief economist, ATB Financial. Twitter: @ABeconomist
“Canada’s energy sector—the previous powerhouse of the national economy—has suffered tumbling prices over the last two years. Oil companies have been scrambling to get their costs down and efficiencies up, but they’re doing this not by cutting wages, but by cutting headcount. Over the last two years, total employment in resource extraction is down almost 21 per cent (most of that in Alberta). But average weekly earnings—which are the highest in the country—continue to rise. Since 2011 they’re up an astounding 17 per cent.
This tells us two things. The first is that Canada has lost a lot of very high paying jobs. That is taking a toll on the macro-economy, especially in the west. The second thing we learn is that energy companies are opting to cut staff, not wages. If you’re still employed by a Canadian oil company, you still enjoy the highest average earnings in the country.”
Women with young children in the labour force
Tammy Schirle, Associate Professor, Wilfrid Laurier University. Twitter: @tammyschirle
“It is difficult to describe the diverse work experience of mothers today. But it’s easy to see their experience has changed dramatically over the past 40 years. I’m thinking about how mother’s paid and unpaid work might change over the next 40 years, and what that means for policy.
Large parts of our policy framework were designed in the 1960s and ’70s, when the majority of moms with young kids stayed away from paid work. Policies like CPP were designed to support that. But today, only 23 per cent of moms with kids age 3 to 5 are out of the labour force. Many choose to stay at home in unpaid work despite good job opportunities (29 per cent have a university degree); some would have difficulty covering child care costs; others will remain out of the labour force after their children are grown. All moms want others to recognize their work is important. But when should we require transfers—as taxes or benefits—from some mothers to others?”
Housing driven by the job market
Sherry Cooper, chief economist, Dominion Lending Centres. Twitter: @DrSherryCooper
“This chart shows job creation in Canada’s major cities and explains why the housing markets have been the strongest in Vancouver and Toronto and their neighbouring exurbs and cities such as Victoria and Hamilton. In addition, foreign money pouring out of China, Russia and the hard-hit cities of Europe is buying homes in these two very attractive cities. I believe housing markets in both cities will slow in 2017 owing to government restrictions and regulatory changes in the mortgage markets, which are already under upward interest rate pressure.”
The burden of federal debt
Aaron Wudrick, federal director, Canadian Taxpayers Federation. Twitter: @awudrick
“We think this chart is important because it reflects the burden we are placing on future Canadian taxpayers. Even at record low interest rates, last year interest payments on our federal debt cost $26 billion—well more than we spent on national defence. Should interest rates rise, it could lead to billions more being spent on interest rather than programs and services.”
Divergence in the housing market
Brendan LaCerda, economist, Moody’s Analytics
“All eyes are on house prices going into 2017. New regulations on the mortgage market are coming into effect and their potency has been the subject of much speculation. Regulators appear committed to improving affordability while also avoiding a painful correction, but significant disparities in regional house price growth complicate federal-level policy-making. To see which metro areas are speeding up and which are slowing down, this chart compares the very recent performance against a longer measure, and use the 45-degree line as a cutoff. Ontario leads the way, Quebec and the Atlantic provinces lay in the middle, while the Prairies lag the rest of the nation. Weak energy and agricultural commodities prices have taken a toll on the Alberta and Saskatchewan economies and mortgage delinquencies are on the rise. A slower than expected recovery in commodity prices also heightens the risk of out-migration, putting additional downward pressure on real estate. Also attracting notice, Vancouver has broken from the pack. Up about 24 per cent year over year, prices have now stalled. A newly imposed tax on foreign purchases diminishes the international inflows that contributed to the city’s spiralling prices. While sharp declines will be avoided, we expect the boom times are over.”
Postponing golden years
David Rosenberg, Gluskin Sheff and Associates
“If there is no retirement savings crisis in Canada, why is employment growth for the aging but not aged Boomers running at 6.5 per cent at a time when it is zero for everyone else? Answer: these folks have altered their calculations on when they can afford to leave the workforce because they need something they can’t get on their Greek cruise. In two words or less: cash flows.”
Shifting gears in the housing market
Dawn Desjardins, deputy chief economist, RBC
“Canada’s housing market is going to shift gears in 2017 after four years of strong gains that pushed sales in 2016 to a record level on the back of regulatory changes enacted by both the federal and some provincial governments. One change we expect to be influential is the federal government’s decision to tighten the mortgage-insurance qualifying requirement in October. In and of itself, we expect this will cut home resales by close to eight per cent relative to our previous forecast and slow the pace of price increase by approximately 0.5 percentage points in 2017. We now expect home resales to fall by 11.5 per cent and the pace of price increase to slow to 1.6 per cent, a fraction of the 9.5 per cent jump in prices recorded in 2016. The impact will vary across the country—with the more significant effect on home resales being felt in high-priced markets in Ontario and British Columbia. There are risks that activity will be even weaker if interest rates continue to rise aggressively should the introduction of fiscal stimulus south of the border drive inflation expectations and U.S. rates up—Canadian rates may go along for the ride.”
Comparing housing markets to other G8 cities
James Price, director of capital markets products, Richardson GMP. Twitter: @JP_RGMP
“For all the talk of a housing bubble in Canada (Vancouver and Toronto, at least), it is important to note that living in any major G8 city—particularly its primary or secondary financial centre—is an expensive undertaking. We chose to add Australia to the G8 to highlight our similar resource-driven export economies, both of whom face the problem of “exporting” secondary homes to foreign buyers. While we don’t dismiss the possibility that over-leveraged households (a product of low rates) and rapid price expansion has led to overheated markets that would suffer in the face of higher rates or unemployment, the calls for crashes in housing because they are no longer affordable to the locals simply doesn’t hold. “
Will real wages keep rising?
Stephen Gordon, Laval University. Twitter: @stephenfgordon
“After decades of stagnation, workers saw healthy increases in real earnings during the resource boom of the early 2000s. Wage growth has slowed since the global financial crisis, but has remained positive. If Canada has been an oasis of political stability over the past few years, this trend of broad-based increases in workers’ purchasing power is at least partially responsible. The concern is what happens next, in a world with low commodity prices, a weak Canadian dollar and heightened worries about international trade. Will real wages in Canada keep rising? And if they don’t, what will be the political fallout?”
Hidden risks for Canadian investors
Alexander MacDonald, investment analyst, Cowan Asset Management. Twitter: @alex_macdonald
“Much attention has been paid to the risks facing indebted Canadian households and their booming home prices. Some attention has been paid to the risks facing Canadian banks if these loans aren’t repaid. What’s receiving less attention, however, is how these risks could affect Canadian investors—including investors who may not be indebted, nor own a home, nor own bank shares directly in their portfolios. The S&P/TSX Composite Index, which many Canadian investment funds track, offers little diversification: the financials, energy, and materials sectors represent the majority of its companies. The weighting of these sectors within the index fluctuates with the underlying industries’ boom-and-bust cycles of profitability. Historically, when one of these sectors’ weightings set new highs, it signalled that industry’s peak profitability. As the chart illustrates, this happened with oil in 2008 and gold in 2011. Earlier this year, growth in household debt helped drive financials’ weighting to new highs. For more