It’s hard to believe, but true: Canada and the United States are now entering the fifth year of economic recovery from the recession that hit both countries over 2008-09.
In the United States, the downturn first took hold in late 2007 and extended through the next 18 months. After enduring its worst slump in 50 years, the American economy officially stopped shrinking in June 2009. Since then, the U.S. has enjoyed 15 consecutive quarters of growth in inflation-adjusted gross domestic product (GDP), although the expansion has been sluggish by historical standards. Indeed, the American economy has been growing at barely half the pace of typical previous recession-recovery cycles. Moreover, per-capita GDP has yet to return to its 2007 level, and employment is well below its pre-recession peak.
Canada followed a broadly similar economic trajectory, except that the decline in GDP and employment was not as deep, and on most counts the economic rebound that started in mid-2009 has been more impressive. Unlike the U.S., Canada has seen a meaningful increase in the absolute number of jobs, as well as higher per-person real GDP. Canada also avoided the disruptive downturn in housing markets and the sharp drop in household net worth that accompanied America’s recession and persisted through the years of weak recovery that followed in its wake.
Looking ahead, it’s time to get ready for an extended economic role reversal in North America: the U.S. is on course to significantly outperform Canada across a swath of economic indicators, not just in 2013 but probably at least through 2015. The main reason lies in the differing state of housing markets and consumer finances in the two countries.
Start with the consumer. Household balance sheets have improved stateside, with Americans having reduced debt (in some cases via bankruptcy) and housing and equity market valuations having climbed – thereby lifting net worth. In Canada, household debt sits at a record high measured against disposable income, whereas the debt-income ratio has fallen appreciably in the U.S.
The Canadian household sector simply isn’t in a position to drive robust top-line economic growth. Consumption, which constitutes three-fifths of economy-wide spending, will therefore be rising noticeably faster in the U.S. than in Canada.
Next, consider housing markets. In Canada, homebuilding has been outpacing underlying demographics for several years, and by 2012 residential investment stood at a near record high as a share of GDP. After several years of frenetic activity, our housing markets have cooled, and starts are falling – a trend that’s expected to continue.
Virtually all economic forecasters agree that residential investment won’t be adding much, if anything, to Canadian GDP or job growth in the near term.
The picture is starkly different south of the border, where, after an epic, multi-year correction that saw unprecedented declines in home prices in many regions, key indicators of housing activity are reviving. Annualized housing starts are slowly growing and should hit 1.3 million to 1.4 million by 2016 – up from 800,000 last year and broadly in line with underlying U.S. demographic trends (population growth and household formation rates). This will be good news for the American economy. It will also benefit some Canadian industries, particularly lumber companies.
There are other factors that also point to an uptick in U.S. economic growth vis-à-vis Canada. One is the surprising jump in domestic oil and gas production, and the related reduction in energy costs for American industries and households that have access to low-cost, gas-fired electricity – which occupies a bigger place in the U.S. energy mix than it does here in Canada. As the U.S. reduces reliance on imported energy, its economy will receive a boost. And America is already making advances in manufacturing competitiveness relative to other jurisdictions – including Canada – thanks in part to lower electricity costs and abundant cheap natural gas feedstock that’s supporting an expansion of production and new investment across a number of energy-intensive industries.
Nothing similar is occurring in Canada, unfortunately.
Finally, Canada’s stock market has missed out on the huge post-2009 gains recorded by the broad U.S. equity market indexes, thus dampening increases in overall wealth here and making it harder for our businesses to raise capital. This disparity in equity market performance may further widen the already sizable gap in private-sector productivity between the two countries.
Add it all up and the evidence suggests that after a half-decade of outpacing the United States in the growth of output, employment, consumer spending and housing market activity, Canada is now facing a perhaps similar period of relative underperformance. While Canada will certainly benefit as the U.S. economy accelerates, the reality is that the principal drivers of domestic economic expansion – consumer spending and housing investment – are largely tapped out on our side of the border. •
