The lousy GDP numbers released on Wednesday aren't likely to steer the Bank of Canada's projections for a modest rebound off course. The central bank's Monetary Policy Report from Oct. 24 revised its former third-quarter expectations – a 2 per cent quarter-over-quarter increase – down to 1 per cent, but still showed small increases to its estimates for the fourth quarter this year and the first half of next year. The message: We got this, eh. No big deal.
So where is Canada's growth going to come from? "The Bank continues to project that the expansion will be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions." With unemployment stubbornly high, consumer debt off the charts, wages stagnant and a slowing housing market, that seems optimistic.
The biggest homegrown threat is housing. Since 2000, construction and real estate-related financial services have crept up as a share of GDP, from 16.8 per cent in June 2000 to 19.7 per cent in August 2012 (see sidebar). Even if that number only declined to its pre-housing-boom levels, such a decline would still shave off almost 3 per cent of GDP and bring us to a standstill or worse.
The BoC's prediction record is fairly solid, though even it hasn't been able to anticipate every shock – Stephen Gordon, an economics professor at Laval University in Quebec City, has charted the wide divergence between how the bank imagined 2008 versus reality.
Economic models are best at projecting the continuation of trends, not their reversal. If the decade-long boom in Canada's housing market cools, all bets are off. You don't need a scorched-earth housing crash for 2013 to be a bit of a bust – just a slide back to the more moderate but still healthy levels that prevailed before the boom. Throw in a few knock-on effects from weak exports – durable goods production was down 1.3 per cent in August – and this thing could go sideways in a hurry.