Many investment articles have been written in the last few weeks about "Canada's Economic Miracle". (1)(2)(3) These words were used to describe the fact that Canada was not affected by the 2008 financial crises and that the job market recovered quickly in 2009. Canada was also profiting from the resources boom and had its fiscal house in order, particularly at the federal government level. The banking industry was solid and faced little turmoil from the meltdown in 2008. The Canadian dollar has been close to par with the American dollar for many years until the last few months.
The Canadian dollar has been falling over all of 2013, recently hitting about 90 U.S. cents for every Canadian dollar. (4) Is this justified? Updating the reasons stated above, the 2008 crisis is now behind us, unless a new crisis emerges. The job market has not been that strong, as the unemployment numbers have been dismal for years. (7) The slowing growth in China and India has translated into a slowdown in resources acquisition. The government debt levels as well as the consumer debt levels are now swelling up again. It looks like the perfect storm is brewing in that all of the factors that once supported Canada are now in reverse.
Not so fast!
Looking more closely at the present day, the bright spots have been real estate, banking and resources. Real estate has been going up due to high international speculation due to cheap prices, high immigration levels and low interest rates. Since real estate did not crash in 2008 in Canada, consumer debt and the financial sector remained healthy, which did not happen in the U.S., Europe and Japan. Banking and real estate are highly intertwined in that loans are primarily tied to real estate. The fact that real estate is still buoyant has allowed credit to expand, which means consumer debt has also gone up.(5)(6) Like the U.S. situation in 2008, the catalyst for the crash was real estate prices. Once real estate prices start to decline, real estate activity slows as well as credit and lending. This filters into consumer spending and loss of employment. This spiral would take out real estate and banking profits. The high amount of international speculation and immigration however may create a different result. (8)(9) Another possible change in outcome could arise if credit is expanded. This is not likely to happen as either banks would have to give up profits, or the government debt would have to increase significantly.
The resource sector has benefitted from the Asia buying of resources. China and India growth are slowing. The only place in the world that is supposedly having growth is the U.S., but this remains fragile. If U.S. growth does materialize, it should create a boom for Canadian exports which has not been seen in years. The U.S. would also need commodities, so the buyer may shift from Asia back to America. A low Canadian dollar would create outsourcing opportunities to Canada. This would offset much of the slowdown alluded to in the above paragraphs.
The Canadian dollar may in fact be predicting some future circumstances, or it may serve as a hedge by making Canadian goods cheaper. Either way, the outcome may not be what is forecasted.
Sources:
1) http://www2.macleans.ca/2013/04/02/and-canadas-stuck/
2) http://www.huffingtonpost.ca/2013/12/14/economic-growth-canada_n_4440493.html
3) http://www.reuters.com/article/2013/04/15/us-economy-canada-analysis-idUSBRE93E05P20130415
7) http://www.statcan.gc.ca/daily-quotidien/140110/dq140110a-eng.htm
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.