Canadian economy 2013: losing some luster?

Author:Kranc, Joel
Position:GLOBAL GLANCE - Bank of Canada
 
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With a new year comes the opportunity to re-set. For the global economy, 2012 did not provide any great leaps forward in growth and in many respects provided causes for continued concern. The fiscal cliff in the United States, weakness in the Chinese economy and a slide back into recession for Europe all marked the year.

In Canada, though, since the Great Recession, the world has looked at its economy as somewhat of a model--a place where muted growth and opportunity were on the uptick and where fiscal prudence and a strong banking system allowed it to grow while other nations were in economic decline.

And though Canada also experienced its own recession, it still managed to outperform other G-7 nations. So, it has become accustomed to moderate growth, even in hard times, and the accolades that go with it.

For 2013, however, Canada may find itself in a different situation. While there are no fears of a recession, a housing crisis or the problems that other nations are facing, growth and the economy in general are expected to experience a slower pace with perhaps more gains realized in the following year.

THE CHALLENGES

Craig Alexander, chief economist at TD Bank, says during the most recent recession there were essentially three things doing the economic heavy lifting: government spending (via stimulus), strength in real estate (due to lower interest rates) and consumer spending (also tied to housing).

"If you think about the forecast going forward, we have a fundamental challenge," says Alexander. "Those three areas cannot be the engines of economic growth."

He notes that governments are turning their attention to deficit fighting and commitment to balance their books over the next several years. On average, government constraint will probably slow the economy by about a half a percent a year for the next couple of years. "It's not enough to derail the economy but it will constrain how fast the economy grows," he says.

The second challenge is the overvalued real estate market and affordability that is problematic in certain urban markets. "In the wake of an exceedingly low interest rate environment for a long period of time, you would expect some excess investment and some over-valuation. The over-valuation is by about 10 percent," says Alexander.

The third economic driver is consumer spending, which, over time, has led to a debt-to-income ratio at an all-time high in Canada--approximately 163 percent. "That is higher than the debt that...

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