Canada’s Economy and Implications for Investors

The Chinese stock market has gone down the drain in recent months. Trillions of dollars have been wiped out in only a few weeks from the Chinese stock market, and investors rapidly ran for the exits. The stock market may not be an indicator of the Chinese economy; however, if China’s economy doesn’t rebound, it could translate into problems for Canada. China consumes much oil, and ranks as one of Canada’s fastest growing export markets; so a slowing China is not a positive for the heavily ladened Canadian resource market.

Copper, an indicator of global economic health, has plummeted to a 6 year low and the price of iron fell 11 percent in one day. It seems as though China is reacting in a draconian manner, from jailing short sellers to setting bans on stock sales by large shareholders. It leaves the question of where Canada is headed if China continues to slump. The drop in oil prices that began more than a year ago has continued as of late, and Bank of Canada governor Stephan Poloz cut the benchmark lending rate by a quarter point to 0.5 per cent to help the economy.

Canadians have helped the recent downslope by their constant willingness to borrow and spend. The amount of debt in which Canadian households have taken on represents its own economic risk. It is also noted that a majority of the money borrowed by Canadians has been dumped into the real estate market resulting in homes being severely overpriced. With an election coming up shortly, it seems as though the capital of Canada is in denial. Joe Oliver, the federal Finance Minister told reporters that Canada was “not in a recession.” On the other hand, Prime Minister Stephan Harper said that external factors overseas are the reasons for Canada’s downward slope and that the factors were outside of Canada’s control. Canada’s manufacturing has not completely recovered even behind a weaker dollar which should have made exports seem much more attractive. In a few years, Canada went from being one of the world’s most stable and organized economies to one of the most vulnerable. Canadian forecasters initially projected a 1% growth in the economy to start 2015. TD Economics has stated that Canadian forecasters consistently underestimated the impact of the sharp decline of oil prices on the Canadian economy. It is estimated that the GDP growth is likely to continue to drop to about 1.2% for the remainder of the year.

The price of oil has shown a significant impact in western Canada resulting in restaurant tables being empty, apartment vacancies rising, and local airports are no longer packed with travelers flying in and out of the their respective western Canadian communities. The unemployment rate has increased in western Canada as massive oil sands projects are put on hold by operators. If Beijing’s economic transition plans do not go according to plan, it could cause panic for the Canadian economy due to Canada’s reliance on a significant amount of exports to China. Since China has played an oversized role in determining the price of global raw materials, the recent crash has even affected Canadian mining companies like Goldcorp, Barrick Gold and Silver Wheaton just to name a few. This sector accounts for a large portion of Canada’s total GDP.

In terms of the housing market, it appears as though there could be a possibility of further interest rate cuts which could lead to an overstimulation of a manageable market expansion. The real estate sector makes up more than a quarter of Canada’s annual GDP and a housing downturn would probably be just as painful as the slump in oil prices. It seems as though higher interest rates or a sudden spike in the unemployment rate would be the only reason for a housing crash. Neither of these speculations seem to be on the horizon in the immediate future. Of course, there are a variety of other factors which could lead to a decrease in the housing sector; such as the mindset of Canadians, if they think they’ve borrowed too much money, there could be a cooling of the markets. If the housing market does in fact unwind, it will send a ripple effect throughout the Canadian economy. It is estimated that 7 per cent of the Canadian workforce is employed in construction which will play a large role if those workers were to take a hit in a slower housing market.

The only bright spot in Canada’s economy today is its large trading partner America. It is suggested that Canada will be able to transition their economy from one that was driven by bitumen upgraders in the hinterlands of northern Alberta and Saskatchewan, to one that is centered on high-tech factories located in southern Ontario and Quebec. The service industry seems to be a bright spot in the Canadian market or even the healthcare sector, soon to be flooded with a wave of aging baby boomers. It is hard to determine which sector will have as much of an impact as oil, gas and mining, which could be a serious concern for the country.

In summary, the current global economic situation is very unpredictable and tenuous. It is critical that your financial portfolio is properly managed so that your financial interests are always protected, especially with the continuing and persistent financial uncertainty. At GTA Wealth Management Inc, we have a long and proven track record of helping your clients protect and maximize their wealth. From risk management to prudent investing, GTA Wealth Management offers complete end to end financial portfolio management with unparalleled personalized service.

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