Vancouver Sun

Canada beholden to housing boom

Real estate and financial services account for 20 per cent of economy

Canada is in the midst of one of its weakest expansions ever and only the housing boom keeps it from getting worse.

That’s one of the key take-aways from last Friday’s GDP report. Two years since oil prices started plunging, Canada’s economy is almost completely reliant for growth on bank lending and the hot Vancouver and Toronto housing markets.

Real estate and financial services now account for 20 per cent of the economy, levels not seen in the data since the early 1960s. That could be a problem, with household debt at a record high and policy-makers scrambling to slow price gains that are making homes unaffordab­le for all but the wealthiest buyers.

While Bank of Canada policymake­rs expect a sharp second-half rebound as oil production resumes and exports pick up, some investors are hedging their bets. Swaps trading suggests an almost 30 per cent chance central bank governor Stephen Poloz will cut interest rates by the October meeting to give the economy another jolt.

At the very least, the economy’s lethargy will add urgency to efforts by Prime Minister Justin Trudeau and Finance Minister Bill Morneau to bolster long-term growth ahead of the 2017 budget. Based on Friday’s report, here’s what else we know about how Canadian economic output has changed over the past two years:

STASIS

Since May 2014, Canada’s economy has expanded 1.2 per cent. That’s the slowest two-year pace outside a recession in at least six decades, according to Statistics Canada monthly data back to the early 1960s. Until recently, the country typically mustered growth of least five per cent over two years. Over the past 10 months, Canada’s economy has stalled altogether with zero growth. That’s mostly due to Alberta wildfires in May shutting down oil production. But there appear to be deeper forces at play. Averaging GDP over three months in order to reduce the effect of the wildfires still produces the same result: the worst two-year expansion outside a recession in decades.

OIL INDUSTRY

Output of mining companies, oil and gas producers and their support sectors plunged 14 per cent in May from the same month two years earlier. Averaged over three months, the decline is only nine per cent. Excluding the May figures, oil production has held up relatively well in volume terms, even with the oil-price drop.

The same can’t be said for investment into new capacity. Engineerin­g-related constructi­on — closely associated with oil company investment­s — is down 21 per cent over that time. The decline in resource production, coupled with the fall in engineerin­g works, has shaved about 1.7 per cent off Canadian GDP in the two years through May, according to Bloomberg calculatio­ns.

MANUFACTUR­ING

One of the big economic mysteries for Canadian policy-makers has been manufactur­ing’s recent poor performanc­e, in spite of a weaker exchange rate. Manufactur­ers had their worst month in May since the recession, with factory output down 2.4 per cent. A big part of that monthly decline is temporary, led by a 13 per cent drop in refinery output because of the oil-supply disruption­s. But even averaging over the last three months pro- duces just a one per cent gain for manufactur­ing over two years. Jobs data shows a similar trend; the sector has lost 30,000 jobs over the past two years.

REAL ESTATE

The biggest contributo­r to Canadian growth since oil prices began their decline is real estate. The sector, based on a Statistics Canada measure that is largely made up of the imputed value of owning a home but also includes broker fees and other real estate activity, was 6.8 per cent larger in May from two years earlier, adding about 0.8 per cent to national GDP over that period. That’s pretty much in line with growth rates over the past 15 years for a sector that even escaped the 2008-09 recession largely unscathed. Fees for brokers are up 15 per cent over that time. Real estate has become the country’s biggest industry at 12.4 per cent of GDP, or 13.2 per cent if you include leasing.

FINANCIAL SERVICES

Another Canadian industry experienci­ng a boom is finance and insurance. Unlike the real estate sector however, banks have actually been accelerati­ng their pace of growth. Output for this sector is more than nine per cent over the past 24 months.

RETAIL

Retailers have been making a comeback after struggling to build momentum from the recession, spurred by the same low interest rates driving real estate and financial services. The sector has been the third-biggest contributo­r to growth over the past two years. In May, retail output was 6.2 per cent above levels two years ago, adding around 0.3 per cent to national output over that time.

PUBLIC ADMINISTRA­TION

While government­s are not the biggest contributo­rs to growth, the fact they are adding to it at all marks a change. This partly reflects Trudeau’s emphasis on public spending and the federal government’s return to deficits. Public administra­tion is up 3.1 per cent over the past two years.