I was given the honour Tuesday of sitting on a panel at the Bloomberg studio in New York to discuss the Canadian macro outlook in front of a blue-chip crowd of institutional investors, government representatives and central bank officials from both sides of the border.
Of the three panelists, there can be no doubt that I was the resident bull. A strange place for me to be, that much is true.
One panelist lamented the aftershocks from the plunge in oil prices, while the other spent much time discussing NAFTA and how its demise is likely to act as a pervasive overhang for exports and business investment.
While I concede elements of their arguments, there are some very important positives taking place in Canada. With the unemployment rate back down to a cycle low (and near 5 per cent on an apples-to-apples United States comparison) we are starting to see wage growth pick up to nearly 2 per cent after years of near stagnation.
Employment growth overall has been robust and two-thirds of this year’s job creation has been in full-time positions, the key underpinning to incomes, confidence and spending. So while the consumer activity that was hitched to the bull market in stocks may be ending, the spending that relates to good old-fashioned income growth is now beginning and is much more powerful than “wealth effects.”
And the rebound in the Canadian dollar will help shave import costs, especially for necessities like food, and as such will help bolster real purchasing power for the segment of the Canadian consumer space with the highest spending propensities.
There is something else to consider. The outlook for the auto sector is bleak, especially since North American sales look to have peaked out, and this longer-term trend toward smart cars. But the auto sector today accounts for just 1 per cent of Canadian GDP. And for all the talk about energy, also likely in secular decline for similar reasons, the reality is that this sector represents 10 per cent of the Canadian economy.
There is another 90 per cent of GDP out there to assess. And much of this is in the service sector. Everyone still talks about energy, mining and autos when they discuss Canada, and yet financials, wholesale and retail, health, recreation, transports and education are far larger segments of the economy.
When I started in this business 30 years ago, barely more than 60 per cent of Canadian GDP was in services. Today, that share sits at 70 per cent and is expanding. In other words, this has increasingly evolved towards a “smart economy” (what the U.S. started becoming a lot earlier, though this may get derailed now that America has a president focused on bringing coal mining jobs to Pennsylvania).
And the fastest growing part of the overall economy in fact is technology. Canada is emerging as a major hub in this respect. The GDP share of tech, both hardware and software, is up to 4.5 per cent. Both employment and output growth in this space are running over 5 per cent. The unemployment rate here is tied for a record low of barely over 2 per cent, and so it is a good thing that the federal government is fast-tracking high-skilled immigrant labour into the country (with President Donald Trump moving in the opposite direction).
Demand for tech
But this uber-tight jobs market in the domestic tech sector is a testament to how strong the demand has been. The data we have gleaned show the Kitchener-Cambridge-Waterloo corridor (“Silicon Valley North” no longer elicits a chuckle) to be on a major upswing and the area’s jobless rate is the lowest in the province at around 4 per cent.
This expanding 4.5 per cent chunk of GDP will help act as a big offset to the secular contraction in the old-economy auto and energy sectors, which is why it is more important for Ottawa to couple its pro-growth immigration policy with tax treatment that will continue to support investment in this high value-added industry.
As an aside, what makes Canada different from the U.S. at the moment is that industry operating rates north of the border have risen to a cycle-high 85 per cent versus 75.3 per cent stateside. This is one reason why the business investment outlook in Canada has improved so markedly of late and is evident across many surveys of corporate spending plans. The tech sector is really bumping against capacity constraints, which will require more investment, as the capacity utilization rate here has surged to 87 per cent.
Coincidentally, the tech boom in Canada has come at the same time as a notable upward shift in productivity growth. From a flat trend last year at this time the pace has quickened to over 2 per cent.
Indeed, it would be nonsensical to extrapolate a four-quarter trend into the future, but even if it is 1 per cent, alongside the federal government’s ‘global skills strategy’, which is inducing high-level immigration inflows and has resulted in labour force growth in excess of 1 per cent, perhaps a case can be made here for a re-rating of Canada’s growth potential to low or even mid-2 per cent levels from a decade of mid-1 per cent. The implications of this would be enormously positive long-term for the currency and returns on Canadian assets, broadly speaking.
To be sure, there is always the possibility that the government (I can include some provinces too — Quebec a notable exception, mind you!) shoots itself in the foot with anti-growth tax changes. But Canada has always seemed to have a knack of doing well in spite of itself.
David Rosenberg is chief economist and strategist at Gluskin Sheff + Associates Inc. and author of the daily economic report, Breakfast with Dave. Follow David and his colleagues at twitter.com/gluskinsheffinc