“The possibility of growth surprising to the upside in Canada is increasing. Despite quite high valuations, the Canadian housing market remains robust as consumers are able to take on more debt at very low rates, which in turn could drive overall economic growth to levels potentially higher than anticipated,” Ed Devlin, managing director with PIMCO said in his latest analysis of the Canadian economy. “It sounds like investors should be happy, right?”
Not so fast.
According to Devlin not all growth is equal and in Canada – since the financial crisis – much of the growth has been a result of record-low interest rates. And this sort of growth isn’t sustainable.
“Canada has been driven by consumers borrowing money at incredibly low interest rates to buy ever-larger houses and to fuel consumption,” Devlin said. “This is not exactly healthy growth, but when the economy is in a free fall post a financial crisis, any growth is better than none.”
Devlin acknowledges the difficult position the Bank of Canada is in, but he has also called for more action from the government.
“BoC Governor Stephen Poloz has been dealt a difficult hand; the BoC has to be very careful of the trade-off between growth and financial stability. Given the ‘serial disappointments’ in the robustness of the economic recovery, the BoC has stressed downside risks to inflation in order to depreciate the Canadian dollar and in turn spur economic growth via increased exports,” Devlin said. “The objective is noble, but the problem with talking down a currency is that if the talk is not followed up by actions, the speculators who are shorting the Canadian dollar today will likely close their positions, leading to an inevitable short covering rally.”
One industry leader believes Canada’s economic recovery – lead in large part by the housing market – has been unsustainable; and he is calling for action from the Bank of Canada.