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Posthaste: Canada could face two more decades of stagnant growth, report warns

canada-stagflation-0528
canada-stagflation-0528

There has been a lot of talk lately about Canada’s dismal growth, but now a new report warns that we could be stuck in it for another two decades.

The study from Canadian financial firm Omnigence warns that Canada is headed for a “protracted bout of stagflation” in which the country will continue to suffer low growth and higher inflation.

“It seems plausible that Canada will continue to experience stagnant real GDP/capita over the next two decades as the issues … are resolved before returning to the more historically typical growth trajectory,” said the report led by Omnigence director Stephen Johnston.

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Canada is expected to have the lowest real growth rate among countries in the Organisation for Economic Co-operation and Development over the next three years, but that doesn’t take into account its rapid rise in population, says the report.

When you look at GDP per capita — “the only metric that matters in the real world” — Johnston argues that Canada has been experiencing “early onset” stagflation for almost a decade. After years of rising steadily, that metric has been flat in U.S. dollar terms since 2013.

Canada is also losing capital, with more leaving the country than is entering it on a yearly basis, he said. And productivity, another precursor to economic growth, has been lagging the United States since around 2014.

 Omnigence
Omnigence

Our housing market is a problem, with a 3-million-home shortfall and no clear resolution to solving it, he said.

Shortages contribute to inflation and divert much-needed capital away from more productive activities.

Canada has the highest share of investment in housing in the OECD, making it overly reliant on real estate for GDP growth.

“Simply put, Canadians spend far too much on housing, use excessive amounts of leverage to do so, at prices that are far beyond any reasonable interpretation of affordability,” said Johnston.

Another challenge is Net Zero targets. The country’s goal to reduce or offset all emissions by 2050 will require a lot of capital, increase the cost of energy and strand or retire legacy operations.

Switching to a greener economy is expected to generate modest GDP growth, but also increase inflation by about 2 per cent for the next decade, according to a study by Bank of America.

During the next two decades, traditional investment portfolios are at risk of underperforming and Omnigence suggests investors consider a change.

The good news is that Canada has an abundance of commodity or commodity-linked assets that do well in inflation, said Johnston.

The report suggests investors looks to real asset investments that have payoffs to inflation and investments where growth is linked less to GDP and driven more by aging demographics, the shrinking middle class or by exports to markets with more robust economies.

Some examples are lower-cost food chains, automotive maintenance and farmland.


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 BMO Capital Markets
BMO Capital Markets

Consumer confidence ticked up in May but Canadians are far from cheery. Confidence has been on a downward slope since the Bank of Canada began hiking interest rates more than two years ago, as today’s chart from Bank of Montreal economist Shelly Kaushik shows. Sentiment on future finances improved in May but it was mixed on current finances, said Kaushik.

The Conference Board of Canada highlighted two risks to optimism in coming months. An early start to wildfire season could dampen spirits in the western provinces, and uncertainty over Bank of Canada interest rate cuts.

“Even after the first cut, rates will remain restrictive — and any future cuts will depend on the path of inflation, the job market, and the Fed,” said Kaushik.


  • Today’s Data: Canada industrial product price and raw materials price index, United States consumer confidence, S&P CoreLogic Case-Shiller home price indices

  • Earnings: Bank of Nova Scotia


 Financial Post
Financial Post


Many of the strategies being put in place to trade the greying of the world reflect inflationary concerns: fewer bonds, more stocks and commodities. But it’s a challenge that can’t be postponed. “We think of demographics as a slow-moving train and it’s not,” says portfolio manager Erik Weisman. “It’s a train that’s barrelling toward us and if you don’t get off the tracks, you’re going to get run over.” Read more on what a world growing older fast means for investing.


Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line with your contact info and the gist of your problem and we’ll try to find some experts to help you out, while writing a Family Finance story about it (we’ll keep your name out of it, of course). If you have a simpler question, the crack team at FP Answers, led by Julie Cazzin, can give it a shot.


McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.


Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com.


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