Some obscure perspectives on Canadian Household expenditure

An economy is an asset that produces flows of consumption and investment expenditure.  In a growing economy you would expect these flows to grow.  Household consumption expenditure, while growing larger every year, has ceased to increase at a faster rate year on year for some time:

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If we exclude imputed rent paid by households (money not actually spent) and money spent on games of chance (excluded here for the benefit of the analysis to follow), annual year on year (Q on Q basis) shows data as of Q4 2015 below growth in flows reached in the late 1980s:

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Why have I deducted games of chance from expenditure?  Well the main reason is I believe that increased expenditure on games of chance is more a sign of consumer stress than consumer health:

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Imputed rent, also a proxy for housing affordability, as a % of household expenditure has increased to close to 16% while expenditure on recreation and culture ex games of chance has fallen steadily since its peak in 1999.

The divergence can be better seen in the following chart showing annual Q on Q increases in these expenditures:

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Canada: some niggles in savings rate data..

As of Q4 2015 the household savings rate was some 4%, down from 15% as of the early 1990s:

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But the data hides a starker reality: disposable income less household expenditure in Q4 2015 left a savings rate of 0.5%.  The 4% savings rate is actually made up for the most part of a pension adjustment, a factor which has held relatively stable.  Not much room here for increasing expenditure.

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Indeed we see a big drop in savings ex pension adjustment from 1993 onwards, matched by a large increase in consumer credit and a further deeper plunge from 2002 to 2008, matched again by consumer credit.   I cannot find stat data from Stats Canada or the Bank of Canada on HELOCs which would provide further information on influences on household expenditure (secured home equity lines of credit being far cheaper than unsecured consumer credit) but the consumer credit data seems to coincide quite well with the drop in savings rates:

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Household and NPO debt relative to GDP continues to rise:

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Canadian Retail Sales: slowing and heavily dependent on Autos

Retail sales fell 1% in cash terms in March on February and by 1.3% in volume terms.  Over the year volume (real) retail sales grew 1.77% and by cash (nominal) 3.17%.

In real terms real volume based retail sales look to be in a declining growth trend (note the smoothed data line) of lower highs and lower lows:

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Across Canada we see weakness in Alberta and relative strength in Ontario over the year in nominal terms:

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But monthly rates of change are slowing considerably from a peak in mid 2015:

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If we just focus on annual data for Canada we see a very strong out of trend upward move

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But this is primarily from motor vehicles and parts sales:

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If we take away motor vehicles and parts and we see a flat retail sales picture (index January 2014 100):

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The disparity between retail sales and retail sales ex motor vehicle and parts sales has not been this big for years:

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But the trend is bigger if we just compare MVP sales to retail sales ex MVP:image

We can see this disparity below: the largest since the early 1990s, itself a rebound from the recently ended recession, so the current strength is significant.image

We can see that motor vehicle and parts sales has contributed close to 60% of retail sales over the last three ears:

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So how does motor vehicle and part sales compare with wage growth?  If we look at cumulative data, in this case annualised rates of change over rolling 5 year periods, we see that motor vehicle and parts sales have well exceeded increases in hourly wage growth:

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“Solving the UK Housing Crisis , the Bow Group”, so what about Canada?

“Denmark prohibits non-EU nationals from buying a home unless they have lived in the country for five years”

This is a worthwhile read.  A report on the UK housing market’s affordability crisis by a UK Right Wing think tank that recommends limiting foreign ownership of the property market.  I can definitely see some relevance to Canadian property markets here and the issues raised are very much in line with those expected by the considerable excess asset focussed money supply growth we see globally.   Unconventional monetary policy and increasing income inequality running alongside slowing economic growth have increased the asset focus of global money supply, especially towards hard real assets such as property that will not disappear in an economic/financial crisis.  

You can see this in the Canadian asset market:

The real return on the S&P/TSX composite since the market peak in September 2007 has been –23% to mid December 2015:

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Yet the value of the Canadian residential property and land has moved the other way:

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Interestingly the MLS Canadian Composite Home Price Index shows an increase of 33% since since September 2007 and the Greater Toronto component an increase of 59.2%.  

And there has been an increasing dialogue on the issue in the Canadian press:

Affordable housing crisis affects one in five renters in Canada: study” “One in five Canadian renters face an affordable housing crisis, spending more than half their income on shelter costs, a problem that appears to be even more acute in suburbs and small cities than in major urban centres.”

Moody’s, The Economist warn of high Canadian debt, housing prices” “”The risks are less around the rapid house price appreciation per se, than the fact that, relative to incomes, homes in Toronto and Vancouver are increasingly becoming unaffordable either to own or to rent,”

The Golden Age of Canadian stock market and other returns may have passed for now…..

The golden age of stock market returns for Canadian investors looks to have ended sometime in 2007:

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Adjusted for inflation, the S&P/TSX has literally only provided returns for those able to take advantage of the significant dips in valuations post 2000:

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If we look at annual returns for holding periods of 10 and 15 years we can see capital gains in decline:

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For those investors unfortunate enough to be paying through the nose for closet indexing mutual fund investments, the real capital returns are likely to be lower still, and more so after tax.  The golden age looks to have peaked in and around 2007.   This is around about the same time that debt and GDP growth took their separate routes.

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If equity markets and commodity prices remain depressed they are clearly going to detract from economic momentum going forward and may well exacerbate the latent fissures in the residential property market that we already know off (i.e. high consumer debt loads and historically high valuations). 

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Wage and salary growth has also been on a slide:

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So yes the drop in market valuations is a concern given the accompanying commodity price weaknesses and other structural risks that have built up in the Canadian economy over the decade.  This will likely raise the odds of much more aggressive monetary and fiscal policy.

This is more or less a follow up from a December 2014 post:

Is Canada’s Mini Golden Age behind it? http://blog.moneymanagedproperly.com/?p=3969

And in the context of the above, this is worth a read – http://tcglobalmacro.blogspot.ca/2015/12/recession-made-in-canada-definition.html?m=1

Some takeaways from third quarter Canadian GDP and other data–27 charts

Durable goods consumption expenditure rose at an annualised pace of 9.4% (autos?) in the third quarter; business gross fixed capital formation (Commodities?) has fallen for three quarters in a row following a weak Q4 in 2014; inventory accumulation slowed dramatically (?); imports of goods and services fell for the second straight quarter running off the back of two weak quarters in Q4 2014 and Q1 2015.

The change in net exports that contributed SO MUCH to GDP showed an historically large bounce, shown here as a rolling two month data piece:

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Deeply disturbing underlying trends in Canadian retail sales data

Looking at new Canadian retail sales data one would be forgiven for thinking that all is well on the retail front: yes we had a downward blip, but we have stabilised and things seem mildly resurgent in the year to August.

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But just as in the US, Auto sales appear to be driving the headline growth rate, which if you have been keeping an eye on my US data missives should give pause for thought:

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So is this not necessarily a good thing?  We know that consumer debt has been on the rise and now stands at historical levels:

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And recent independent commentary has also pointed out the large increase in auto related debt: When will Canada’s subprime car loan bubble burst?

But the clincher is the relationship between sales of motor vehicles and parts and wage growth: the following chart looks at annual rates of changer over rolling 5 year periods to average out short term ups and downs, to get a better look at the strength of the data relationships:

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As we can see, auto related spending has taken a manifold hyper leap relative to the rate of change of employee wage growth.   This is all deeply disturbing. 

Is Canada’s Mini Golden Age behind it?

I remember back in the 1990s looking at long term Canadian stock market performance and thinking how lacklustre it had been.  Since then of course things changed: while many markets have fallen back below levels reached in the 1990s (UK, France, Japan,  Italy) Canada’s stock market, up until recently, has been ratcheting up one peak after another; its markets have behaved more like developing Asian markets (South Korea, Hong Kong etc).

Commodity price and production increases have played a large part in much of post 1990s economic performance as has a considerable debt financed house price/construction boom and other debt financed consumer expenditure.

With the recent hefty collapse in oil (other commodity prices have been falling for a while too) it is worth asking whether Canada’s mini golden age has passed.   Certainly the boost that came from a debt financed property market boom is unlikely to be repeated and the consequences of debt more likely than not to weigh on future economic growth.  Additionally, China, a key figure in the growth of world trade and demand for commodities post 1990s is slowing down. 

But what of other dynamics?  Well population growth and aging are very important and have likely been a major factor in slowing global growth.   If we look at employment growth between 2000 and the present point in time we see that Canada has significantly outperformed the US and a good part of its economic performance has likely been due to this superior metric:

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Recently a Statistics Canada report eulogised Canada’s population growth, the highest amongst G7 economies but I see more troubling trends behind the data:

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The age 65 and over population is expanding rapidly at the same time as under 20s has actually been falling.  Back in 1990 12.5% of the US population was over 65 and 28.8% was 19 and below.  In Canada the respective figures were just under 11% and 27.7%.  By 2013 US over the age of 65 had risen to 14.14% and those under 20 had only fallen to 26%.  In Canada the respective figures were 15.3% and 22.3%.  The trend is divergent: the working age cohort in Canada started at a higher level and has now shrunk to a lower level and looks set to fall further.

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We can see the growth rate of the key 20 to 54 age group has been declining steadily.

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We also note that employment growth in the 20 to 24 age group (and hence the 20 to 54) had benefited some from a recovery in growth (long since past) in the 0 to 19 age group from the mid 1980s to the late 1990s.   This has now worked its way out of the system.

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Canada has seen relatively strong employment growth from the late 1990s to around 2008, which had held up reasonably well post 2008.  But if we assume that the 0 to 19 age group is declining and that the surge in employment growth has been due to a temporary surge in growth in the younger cohorts, expect employment and economic growth to suffer.   Also expect demand for highly priced properties to abate.

Poor demographics and high levels of debt combined are highly deflationary.  Moreover high levels of debt and slow economic growth risk further weakening population growth, compounding growth and debt problems.   This to my mind is a key reason why we need to worry a lot more about debt levels.   

Just looking through Canadian Q1 GDP data

If we were to look at headline real GDP growth to Q1 2014 we would see slow but stable growth:

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But if we take out net exports and inventory accumulation, final domestic demand has been on a long slide:

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And exports (especially goods exports) have tailed off over the last two quarters, with the net export contribution coming from a decline in imports:

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Canada’s GDP trend looks odd!

There are a number of reasons why Q3 GDP came in at its highest level for some time.  One of them is a fairly large increase in inventories:

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If we exclude inventories the trend in GDP growth is one of lower highs and higher lows – in other words boundaries of growth are narrowing, which is interesting when you assess the historical boundaries:

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Thoughts on the Toronto Condo market: crash or soft landing..?

Just reading a Globe and Mail article on the Toronto condo property boom:

resale statistics suggest that most of those investor-purchasers are holding their units for long-term gains rather than flipping them for quick profits…..“Tal, like many economists, believes that Canada will come in for a soft landing, not a crash. But Toronto’s condo industry still feels uncertain.”

The first comment, of course, is a throw away line and means nothing.  The second is arguably incorrect and ignores some key dynamics that could well lay the ground work for a crash.

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Canadian growth slowdown….

Canada is exposed to a weak consumer (high consumer debt), a weakening residential construction sector (and attendant financial sector risks), fiscal constraints and a dependency on weakening global growth.   

GDP grew by some 2.5% in Q1 2013, the fastest pace since Q3 2011.  Much of this was due to a rebound in energy exports following on from disruptions in 2012.  Other important contributions came from government expenditure and a small rise in inventories, but the overall picture is one of slowing growth:

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Canadian House Prices

House prices across the OECD: (Hat tip A Fistful of Euros)

Excerpt: “Where houses appear overvalued but prices are still rising. This is the case in Canada, Norway, New Zealand and, to a lesser extent, Sweden. Economies in this category are most vulnerable to the risk of a price correction – especially if borrowing costs were to rise or income growth were to slow.

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Retail sales: Ontario and Toronto, the fly in the ointment!

Canada’s retail sales jumped 0.7% month on month, but most of the gains were concentrated outside of Canada’s largest province: Ontario retail sales grew 0.06% and have fallen since March by 1.16%.   Retail sales data adjusted for the fact that there were 5 weekends in July 2011 and only 4 in 2012: actual year on year unadjusted data showed much weaker growth.  All data is sourced from Stat’s Can.

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Beneath the surface of Ontario’s economy: what support for the housing market?

There has been a rising chorus of commentary on the Canadian housing market bubble of late and a number of recent articles (1, 2, 3) have infused the debate with comments from Robert Shiller of Yale. Shiller is one of the very few academic economists who does not appear to be caught by the Ivory Tower syndrome of efficient markets and rationale individuals.

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Concerns about flipping may be overblown!

Well, I do not know more than the anecdote, but a couple of weeks ago, as we stopped off at a Starbucks on the way up north, I overheard a barista saying he was offered 5k a month to help flip properties.   No disrespect, but there might be something going on!

While investors represent a large share of condo buyers, concerns about property “flipping” might be overblown, the report adds.

Canada?

Quarterly retail sales growth weak, but not unlike 2011:

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But residential construction as a % of GDP growth, 5 year rolling, presents some interesting visuals:

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As of Q1 2012, residential construction represented some 48% of nominal GDP growth, and including non residential structures, some 66%.

I do not know about “you”, but driving round Toronto is all about spot the crane!  Really, have you ever seen so many cranes?

Canadian Consumer Debt

I was at a meal the other night, talking to “a generation below” who had been making residential property purchases.  We somehow got onto the topic of house prices and debt and the whole European debt debacle.  What amazed me, and concerned me, was just how unaware they were of consumer debt issues in Canada and the risks these high debt levels posed to the housing market.  Continue reading

Canada Q3 GDP – weak domestic economy bar residential investment and exports..

Real GDP increased by 0.9% in the third quarter, or an annualised 3.8%.  At first glance this would appear to be a healthy clip.

Real personal consumption expenditure weakened, contributing just 21.6% of the increase in real GDP in comparison to its weight in real GDP of 63.2%.   Nominal personal expenditure comprised 30% of the increase in GDP and compared to a weight of 57%: why the difference between the two – real GDP measures changes in volume and suggests that the volume of GDP consumed by personal expenditure has increased more over the years due to the price deflator being less for this component of GDP – note that the Canadian dollar fell significantly from 2003 onwards.

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Real government expenditure (including its contribution to gross fixed capital investment, but excluding inventories) contributed negatively to real growth in the quarter but positively to nominal GDP (12%) – government expenditure as a % of real and nominal GDP is some 25%. 

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Real business investment in non residential structures and equipment fell by 15%, as a % of the increase in real GDP, well below its component share of GDP of 20%: real investment in machinery and equipment fell 32%.  Nominal figures contributed 4% to nominal GDP relative to a 12% component share, with investment in nominal machinery and equipment falling by 8% of the increase in GDP.  Again the higher volume component of the real GDP figures looks to be due to the appreciation in the loonie reducing the cost of imports and capital goods.

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Real investment in residential structures rose by 18.2% of the increase in GDP, well above its share of GDP of 6.04%.   Nominal investment in this category represented 7% of GDP and rose during the quarter by 19% of the increase in GDP.

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The major contribution to real growth was a rise in exports and a decline in imports, equivalent to 134% of the change in real GDP over the month.  Final demand rose by 0.2% excluding the impact of exports.  In terms of nominal GDP, the net increase in exports was some 91% of nominal GDP. 

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The quarterly increase in the contribution of net real exports was the third largest post war increase.   This is significant.

Also of potential significance is the apparent relationship between nominal residential structure investment and nominal net exports as a % of GDP.

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Overall, underlying domestic economic growth is weak and dependent on global demand just as a) the consumer seems to be reining in expenditure, amidst high debt levels, and b) as government deficit reduction measures bite into final demand.   Canada is exposed to weakness in global growth and high levels of debt.