The mainstream media called out from the roof tops that Canada’s GDP and economy was back on track Friday. After far better than expected GDP numbers (0.6%) for January surfaced some political and economic pundits were doing nothing short of a rain dance as if the demographic cliff, anemic growth in the developed world didn’t matter and oil prices were back at $100 per barrel.
Canada GDP jumps as debt rises
Titles such as Startling Canadian GDP numbers could signal economic turning point, topped Google searches Friday morning.
The excitement followed the release of January’s GDP which came in at a 0.6%. What does that mean?
If Canada put up 12 months of 0.6% growth, annual GDP would be in the 7% range. In other words, Canada would be growing faster than China…
China’s growth fell to annualized low of 6.9% in 2015 – a 25-year low.
Canada GDP – last 6 Months
The 4 straight months of gains have led some to assume the trend could be here to stay. In almost comical fashion, given the failure in the U.S., European and countless other markets, the Financial Post came out with an article titled Japan and Canada show fiscal good sense, which praises the tax and stimulus spending recently announced in Canada’s 2016 fiscal budget. This makes little sense as the Liberal budget would have had no time to impact these numbers.
Before celebrating the growth, which in certain sectors is showing substantial resistance. I would point to the elephant in the room: household and or private debt.
Debt tied to recession and debt crises
Consider this fact: In the U.S. from 1952 to 2008, every time credit (adjusted for inflation) grew by less than 2% the United States went into recession and did not recover until there was a new surge of credit expansion.
In an easy to miss article published this morning, titled The inevitable debt crisis Canada’s not talking about, Canada’s real problem is examined:
“Mr. Vague says that any country whose private-debt-to-GDP ratio goes beyond 150 per cent and that has a five-year rate of growth of 18 per cent or greater in that ratio experiences a financial crisis at some point. (The data comes from the Bank for International Settlements.) These two milestones were surpassed during Canada’s recent borrowing binge. Canadians collectively owe more than 208 per cent of GDP and private debt to GDP grew more rapidly than the guideline between 2011 and 2016. Private debt grew from 182 per cent of GDP to 208 per cent, well above the benchmark rate of growth for five years.”
In other words, we have crossed the threshold.
“In 2016, Canada qualifies for a private-debt crisis without caveat.
When will the crisis hit? Exact timing is difficult, but it could arrive when Canadians decide to stop borrowing more. Or, more likely, when lenders restrict the availability of new credit, since aggregate demand depends on households and businesses going deeper into debt.”
Even assuming a robust 3% GDP growth target in Canada for 2016, which is unrealistic, given the state of the resource and materials sector, Canadian private debt is still growing at more than 5% a year. And, like in the United States, if it stops, in our current fractional reserve banking system we will have a banking crisis and a recession. Sorry to darken the mood on this glorious spring day (in Vancouver), but the private sector and households that support this economy are swimming in debt to their eyeballs.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.