Canada has been growing, right? But is it the right kind of growth?

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The graphs shows net exports as a % of GDP from Q1 1961 to Q2 2011.  Well, we may have been exporting commodities and such, but we have been importing a whole load too.   Exports have not contributed to growth for some time and with significant increases in consumer debt over the last 4 years, we could assume the consumer has been largely responsible. 

But was this not the US problem (too much imports) and isn’t every country in the world now trying to export its way out of trouble?

Well, relative growth does not look as if it has been due to business investment in machinery (red line), which is close to historical lows as a % of GDP.

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But what of government expenditure: the next chart shows government expenditure as a % of GDP.

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Government expenditure has gone from 21% to 26% of GDP from 2000 to 2011, with a noted acceleration over the last few years.

Consumer demand?  Well let us take a look at total private and unincorporated business debt in Canada (Q1 1990 to Q2 2011).

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Government expenditure, construction and debt have all increased at extraordinary rates – not the kind of growth you want!

Data source for graphs came from Stats Canada

A perspective on the Canadian housing and debt bubble

Following on from the news that household credit market debt as a percentage of GDP is as good as 150% of household disposable income, please note the following (data sourced from Statistics Canada).

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Residential fixed investment as % if GDP (1961 to 2011 Q2) is at historical highs. 

But, look at renovation expenditure as a % of GDP (1981 Q1 to 2011 Q2).   Off the wall!

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Souce of data: Statistics Canada

Canada – “The real effects of debt”

A recent BIS report on global debt made the following statement.

http://www.bis.org/publ/othp16.pdf

Our results support the view that, beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Our examination of other types of debt yields similar conclusions. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.”

Canada exceeded all three debt to GDP thresholds as of 2010, accompanied only by the UK and Portugal in this respect.

Yes, yes of course,debt interest coverage ratios are relatively low due to very low interest rates and US and other economies only hit the proverbial brick wall when interest rates had risen well above current levels.

But, in a deflationary period, interest rates do not need to be high to affect high debt to income ratios: declining global economic growth could pose the same type of strains on earnings that higher rates otherwise would. 

And Canada is exposed to further global turmoil: of concern is an uncompetitive exchange rate and the fact that economic growth has been driven largely by construction and commodity based industries.