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.

Recommended

The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021
With the right political will, inflation can be defeated
Inflation

With the right political will, inflation can be defeated

Governments and central banks can easily control inflation, says Merryn Somerset Webb – they just need the will.
17 Sep 2021
Uranium price is melting up
Commodities

Uranium price is melting up

The price of uranium has hit an eight-year high after being in the doldrums for much of the past decade
17 Sep 2021
Why are energy prices going up so much?
Energy

Why are energy prices going up so much?

UK energy prices are going through the roof, with electricity the most expensive in Europe and gas at its highest for 13 years. Saloni Sardana explain…
16 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
How to stop recurring subscriptions becoming a drain on your money
Personal finance

How to stop recurring subscriptions becoming a drain on your money

Tracking and pruning subscriptions isn’t as easy as it sounds. Here's how to take charge.
14 Sep 2021