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Canada witnessing dramatic economic shake-up: Bank of Montreal vice president


January 30, 2016   by Jason Contant, Online Editor


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Canada is not necessarily in a recession, but the country is experiencing a dramatic shake-up of where economic growth is coming from, the Bank of Montreal’s vice president and senior economist said on Thursday.

Alberta saw a nearly 3% decline in real GDP in 2015

“We’re looking at, for example, almost a 3% decline in real GDP in Alberta last year,” said Robert Kavcic during a presentation titled Economic Perspectives at the P&C Crystal Ball 2016 conference in Toronto. “That’s still an estimate – probably another 2.5% this year. When you look across the oil-producing provinces… effectively all three of those oil-producing provinces, we’re looking at GDP growth declining again this year.”

On the flip side, Kavcic said, British Columbia is showing “a solid, steady 2.5% GDP growth” and Ontario is also experiencing a 2 to 2.5% growth in GDP. “Believe it or not, we haven’t seen Ontario outperform the national average on a sustained basis like this in probably 15 years,” Kavcic said during the presentation, held at the International Plaza Hotel in Toronto. “So for Canada’s biggest economy regionally to be such a laggard for so long – now moving back towards the top of the leaderboard – that’s a pretty dramatic shift. It ready does highlight how the relative economic strength of this country is changing below the surface.”

Practically, what that means is there are spillover effects into other aspects of the economy, Kavcic said. “Alberta’s jobless rate has quickly jumped to 7%, while the national rate has just backed up a little bit,” he told conference attendees. “You will probably have to go back 20 or 25 years to find a period where Alberta had a higher jobless rate than the rest of Canada.”

So while there’s not a widespread recession in Canada, there are “pockets of extreme weakness,” Kavcic added, noting that recessions are characterized by duration, depth and dispersion. On the duration side, there was two negative quarters of growth last year, but the depth of these declines were less than 1% annualized, he explained. “If you put that in historical context, it really doesn’t come close to what we saw in 2008; doesn’t really match what we saw in those real recessions in the early ‘80s and ‘90s.” However, regarding dispersion, there was a “very dramatic decline in capital spending activity in the energy sector.”

But look beyond that, “we saw almost 100,000 jobs created; we saw record auto sales; record home prices on average across the country; accelerating residential construction activity – which historically you never see during a recession; record household net worth and, last year at least, a balanced federal budget. If Canada is in a recession, it’s probably the best recession we’ve ever seen,” he said.

Still, the Canadian dollar did briefly dip below 67 cents relative to the American dollar, Kavcic added, although it has bounced back. But Kavcic said he doesn’t believe the Canadian dollar has bottomed out, mainly because interest rate spreads are moving more in favour of the U.S. “That’s probably the biggest headwind against the Canadian dollar,” he said. “The second headwind is oil prices. We think a lot of the decline is probably in place, but it’s going to make a much bigger supply response to get prices moving ahead again, which we just haven’t seen yet.” Kavcic predicted that the Canadian currency will probably hit a low of about 66 cents mid-year, but towards the end of 2016 and into 2017, “that’s when we’ll probably start to see a floor put under the Canadian dollar.”

Kavcic explained that when rates do start to rise in Canada – probably mid-2017 at best – they’re going to rise at a much slower pace at a much lower level than what had happened in the past. “A much lower for longer interest rate environment than what we’re used to historically – that continues to be our story on the interest rate side,” he said.

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