What made Canada’s economy strong now hurting growth?

It wasn’t so long ago, during the 2008-09 financial crisis, that Canadians were encouraged to take advantage of cheap debt to help consume the country out of recession.

Almost five years later, it appears that advice has come back to bite the Canadian economy.

According to a recent report from BMO Capital Markets, growing consumer debt, a slowing housing market, slashed government spending and low business investment are to blame for Canada’s current economic drag.

“The Canadian economy, held up as a model for other developed countries following the Great Recession, is now facing its own difficulties,” says the report from senior economist Benjamin Reitzes.

“Domestic growth drivers are all but tapped out.”

For starters, Canadian consumers can no longer be counted on to keep fuelling the recovery, especially considering the current debt to-personal disposal income at a record 153 per cent in the third quarter of 2012, Reitzes notes.

“Canadian consumers were the lynchpin of the economic recovery, contributing more than half of total GDP growth in 2010 and 2011. Unfortunately, a good chunk of that consumption was fuelled by debt, making it unsustainable,” he writes.

As for business investment, Reitzes says corporations continue to sit on a “significant stock of cash,” which Bank of Canada Governor Carney has called “dead money.”

Given the sluggish U.S. economy and weak commodity prices, Reitzes believes there’s little incentive for businesses to open the spending taps in the near term.

As for government spending, it's all about cutbacks across Canada as the public sector battles deficits built up from stimulus spending during the financial crisis.

"With government spending accounting for about 25 per cent of GDP, the lack of growth will restrain overall activity," Reitzes says.

The result? According to the report, Canada is entering a lengthy period of economic “underperformance.”

“Consumers and housing can no longer carry the economy, governments are expected to remain cautious, and business investment likely won’t grow strongly enough to provide a full offset,” Reitzes says, which leaves the country "at the mercy of the global economy."

Anyone who has been paying attention to the U.S. economy and the ongoing recession across Europe knows that's not very encouraging news.

“Until they pick up, get used to sub-2 per cent growth,” in Canada, says Reitzes.