Decline in GDP from Alberta wildfires reveals underlying weakness; slowing housing and growing government debt add further challenges

OTTAWA, Sept. 13, 2016 – The economy’s recent contraction showed just how vulnerable Canada is to unexpected shocks such as the Alberta wildfires this past spring, but the underlying trends portend a continued recovery heading deeper into the second half of 2016, despite a slowdown in housing and growing government debt.

MLI Munk Senior Fellow Philip Cross, in his most recent quarterly economic review, finds the wildfires’ effect on oil production contributed to the recent decline in gross domestic product.

But if the economy were stronger, it would be better able to deal with such shocks. Cross writes that attributing the slowdown entirely to the wildfires “glosses over that the underlying trend of the economy is weak enough that singular events can significantly reduce GDP”.

To read the full commentary accompanying the release of the LEI, click here.

Still, though, the underlying numbers in MLI’s Leading Economic Indicator, developed by Cross, give a much more reassuring perspective on the short-term course of the economy than the quarterly drop in GDP. Even as output was falling, the leading index was signalling an upturn in growth with a third straight gain in July.

However, the year-over-year growth of the index is still the weakest since the depths of the 2009 recession.

The details of the leading index highlight some of the underlying problems in Canada’s economy, notably in manufacturing and housing. The housing component contracted 0.8 percent in July, cooling a potentially overheated market but removing an important source of growth.

The slump in sales steepened in August, according to preliminary data, after a new tax on foreign buying of homes in Vancouver sent sales tumbling. The housing sector was a major reason why growth in the BC economy has been so dominant within Canada.

While we are continuing to experience volatility, steady growth in employment and the MLI leading indicator point to a resumption of growth in the second half of the year. However, this recovery will be constrained by falling business investment in Canada and the US, which not only reduces growth in the short-run but dampens long-run potential.

Bigger government spending also holds real danger for the Canadian economy.

Government deficits in Canada are clearly trending up again, led by the federal government. Over the past four quarters the federal deficit has expanded steadily to $13.3 billion, as spending growth nearly doubled while revenues stalled.

This spending, thought by many to be “stimulative” has not arrested the decline in business investment, and may even aggravate it if investors regard large budget deficits as future tax increases, and low interest rates as a reason to not save and invest.

The index is available on Bloomberg and is intended for journalists and analysts who follow the macro performance of the Canadian economy. Quarterly economic analyses by Cross, based on the results of the indicator, will appear on the MLI website.

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Philip Cross is a Munk Senior Fellow with the Macdonald-Laurier Institute. He previously served as the Chief Economic Analyst for Statistics Canada, part of a 36-year career with the agency.

The Macdonald-Laurier Institute is the only non-partisan, independent national public policy think tank in Ottawa focusing on the full range of issues that fall under the jurisdiction of the federal government.

For more information, please contact Mark Brownlee, communications manager, at 613-482-8327 x105 or email at mark.brownlee@macdonaldlaurier.ca.