Canada: another victim of the commodities downturn

While the American economy is slowly gathering strength, its northern neighbour is sputtering to a halt as commodities slide.

While the American economy is slowly gathering strength, its northern neighbour is sputtering to a halt. Canada's economy shrank marginally in each month from January to May, and the statistics are likely to show that the trend continued in June. Technically, that would put the economy in recession.

The main problem is the slump in commodities prices, notably oil, which has dented exports and reduced momentum throughout the Canadian economy. Investment by energy firms accounted for 18% of overall capital expenditure and 3.6% of GDP last year, says The Wall Street Journal's Paul Vieira.

In the first quarter, business investment in oil rigs and machinery slipped by 4% quarter-on-quarter, and the downturn has spread to other sectors: overall business investment slipped by 2.5%. It's hard to see consumption picking up the slack. Unlike theirUS counterparts, Canadian households never paid down their debt after the financial crisis. The ratio of household debt to disposable income is now 163%, up from 66% in 1980.

In America, this ratio has fallen from 130% to 100% in the six years since the global crash. Canada missed the worst of the global crisis, so consumers, encouraged by rising house prices, just kept shopping. These debts, a stagnant labour market and overvalued house prices suggest scant scope for more spending, even if the central bank has just cut interest rates to 0.5%.

A national election in October, which could see the business-friendly Conservative government lose, may also cause uncertainty. A former federal economic official, Kevin Page, has said the recession is "quite contained", says seekingalpha.com's Wolf Richter. We'll soon find out if he is right.

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