BC Business
Why Canada's economy is set to slide
In the third quarter of 2017, Canada’s economic growth slowed to 1.7 per cent (quarterly annualized) from an average pace of 4 per cent in the first half of the year. This is a sign that the economy will expand more moderately in 2018 and 2019, according to HSBC Holdings plc’s most recent Global Economics Quarterly.
A key reason for the slowdown in growth in the next two years is that consumer spending will probably decline, HSBC forecasts. The strong growth in 2017 was supported by higher full-time employment among 25- to 54-year-olds and transfers linked to the federal government’s Canada Child Benefit, along with households’ willingness to go deeper into debt. Canadian household debt was 101 per cent of gross domestic product in the second quarter of 2017.
The report notes that this is the highest level in the G7 and far higher than the average household debtto-GDP ratio of 63 per cent for the other G7 nations. The increase in household indebtedness developed alongside overvalued housing markets, especially in Vancouver and southern Ontario. With new measures to tighten mortgage lending regulations, the Bank of Canada signalling that rates could rise, and slower employment growth anticipated in the next year, HSBC predicts that consumption’s contribution to GDP growth will drop.
Externally, Canada’s current account deficit remains near 3 per cent of GDP. With domestic gross savings far below gross investment, foreign portfolio inflows have been an important source of funds, making Canada vulnerable to global financial market turbulence, according to HSBC.
Globally, the report, titled The inequality challenge, expects 2017 to have been the strongest year for growth since 2010 but warns of potential problems. Both inflation and wage growth are generally low, and since the financial crisis, income inequality has widened while the policies instituted by central banks and governments have been slow to deliver stronger growth. Besides leading to political unrest, income inequality suppresses consumption and can be negative for growth if the savings of higher earners do not push up productive investment, the report explains. Although some redistributive policies, such as higher tax rates on wealthy individuals, may improve income inequality, they could also have a negative effect on growth.