Canada’s economy isn’t just taking body blows, writes James Thorne – it’s on the verge of a knockout.ViktoriiaNovokhatska/iStockPhoto / Getty Images
Mike Tyson once said, “Everyone has a plan until they get punched in the face.” The statement applies to Canada’s economy as its façade of strength isn’t just cracking, it’s shattering under the weight of harsh realities.
As the Canadian economy picks itself off the canvas and we assess the damage from the impacts of unprecedented government spending during the COVID-19 pandemic, we must confront a brutal truth: the private sector has been taking a beating for years, and only now are we seeing the full extent of the carnage as the public sector increasingly dominates the economic arena.
During the pandemic, Canada’s government unleashed a jaw-dropping $230-billion in direct support, making it one of the most profligate responses globally. This intervention was made possible by Canada’s pre-pandemic fiscal position, boasting the lowest net debt to gross domestic product ratio in the G7.
But this veneer of economic robustness is a cruel illusion, undermined by a shocking reality: Canada also carries the highest consumer debt relative to disposable income, a staggering 187 per cent. And Canada’s per capita GDP growth has not just lagged the U.S.’s, it’s in danger of plummeting below the Organization for Economic Co-operation and Development average.
Let’s not pull any punches here: Canada’s economy isn’t just taking body blows – it’s on the verge of a knockout. The “punch to the face” isn’t a distant threat; it’s a relentless barrage hammering the private sector, which has been absorbing the impacts of skyrocketing interest rates since the Bank of Canada tightened its monetary policy. Meanwhile, the public sector’s bloated expansion has created a dangerous mirage of stability, masking the private sector’s struggles.
The federal debt-to-GDP ratio has exploded due to pandemic spending, and the government’s strategy of issuing long-term debt isn’t just risky, it’s setting up for a devastating uppercut that could send the economy crashing to the canvas. Reducing fiscal spending is a matter of economic life and death.
Perhaps the most alarming trend is the disparity between public and private sector job growth. From February, 2020 to June, 2023, public sector employment ballooned by an obscene 11.8 per cent while the private sector barely managed a 3.3 per cent increase. In British Columbia, the situation is even more dire, with public sector jobs skyrocketing by a mind-boggling 22.6 per cent, while private sector employment rose by a mere 0.3 per cent.
The implications of this rapid public sector growth are catastrophic. Critics warn that expanding the government workforce isn’t just throwing a jab at private sector job creation, it’s delivering a knockout blow to economic productivity. One glance at productivity growth or per capita GDP growth reveals the current predicament.
Meanwhile, despite receiving significant federal transfers, many provinces are battling rising health-care costs and an aging population, a combination that could lead to unsustainable debt levels that make Greece look fiscally responsible. The toxic cocktail of high government debt, increasing unemployment in key sectors, and vulnerabilities in areas such as real estate could devastate the Canadian economy.
It’s crucial for Canadian investors and policy-makers to wake up and smell the pending disaster. Austerity measures on the horizon in other nations, such as the U.K., are a preview of what could be in store for Canada.
Rather than facing a hard landing, Canada’s economy is in a nosedive. With unemployment rates hitting 7.7 per cent in Alberta and 7 per cent in Ontario, it’s clear that key economic engines aren’t just sputtering, they’re on fire.
Adding insult to injury, the markets are forecasting the Bank of Canada overnight rate to be close to 2.75 per cent by the end of the second quarter of 2025. This projection is delusional. The reality is that a significantly lower rate environment will be needed for an extended period.
The monetary policy transmission mechanism remains broken, with its damage intensifying post-COVID. Banks are now required to provision for loan losses earlier in the credit cycle, turning these provisions into leading indicators. Furthermore, bank balance sheets, according to the U.S. Federal Deposit Insurance Corporation’s latest quarterly report, are in worse shape than after the global financial crisis. Common sense dictates that banks won’t be loosening lending standards anytime soon.
The disconnect between market expectations and the underlying economic fundamentals is a pending risk. The coming years won’t just demand strategic foresight and careful planning; they’ll require nothing short of economic resurgence to secure a sustainable future. Canada must not just confront its challenges. It must fundamentally reinvent itself to have any hope of emerging from this economic bout.
James Thorne is chief market strategist at Wellington-Altus Private Wealth Inc. in Toronto.
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