Canada Low Growth Conundrum Continues

Optimism in Canada’s economic recovery rose this week following the release of better than expected GDP and employment data. But beneath the headlines were signs of deterioration that signal the continuation of Ottawa’s low-growth conundrum.

Gross domestic product accelerated 3.5% in the third quarter, the fastest quarterly expansion since 2014, Statistics Canada reported. That followed a 1.3% contraction in April-June caused by devastating wildfires in the country’s oil-producing region, Economic Calendar reported.

The statistics agency reported that employers added 10,700 jobs last month, confounding analysts’ expectations for a loss of 20,000 jobs. While much stronger than expected, all of the gains came in part-time work. The prevalence of part-time work highlights the deteriorating quality of jobs in an economy once anchored by a booming resource sector.

Around 8,400 full-time positions were lost in October, while 19,400 part-time jobs were added. In fact, part-time work has been responsible for virtually all of the job gains in the past year and a half.

The Bank of Canada has remained in policy purgatory since cutting interest rates twice in 2015. Policymakers came close to cutting interest rates again in October, according to Governor Stephen Poloz. The bank has adopted a wait-and-see approach as the economy continues to sputter. Rising oil prices and fiscal stimulus south of the border could help the Canadian economy regain momentum next year, but the outlook remains tilted to the downside.

Canada faces another critical challenge that could hamstring growth in the near term. Residential investment declined sharply in the third quarter, a tidbit that was lost on many market participants encouraged by the 3.5% headline GDP figure. According to analysts, this means that Canada’s housing market may be nearing its peak.

Economists note that a subcategory for residential investment that serves as a proxy for real estate commissions was the major culprit for the decline in residential investment.

Market participants have long been concerned about Canada’s housing market, which has been dubbed the most overvalued in the world. This led the government of British Columbia to slap a 15% tax on foreign buyers in Metro Vancouver in a desperate attempt to rein in runaway price growth for regional real estate. The federal government last month also introduced a new stress test for approving high-ratio mortgages.

The International Monetary Fund’s October outlook report predicted that the Canadian economy will expand just 1.2% this year. By comparison, advanced industrialized nations as a whole will grow 1.6%. Canada’s growth is expected to reach 1.9% in 2017, which is above the average for advanced economies.