Here's Why Canada's Economy Is In Serious Trouble...

Here's Why Canada's Economy Is In Serious Trouble...

While the international community tends to focus on a more obvious, potentially more consequential house of financial cards – China – America’s neighbor to the north has been exemplifying several economic red flags for some time now. At this point, the confluence of widespread household debt, misguided government spending which is unlikely to stimulate growth, and policy decisions that have and will continue to discourage foreign investment in Canada is a recipe for seemingly unavoidable financial ills, if not disaster.

Regardless of which source you consult, you’ll be hard-pressed to find somebody willing or able to paint Canada’s collective financial future through an optimistic lens. There are simply too many facets to Canada’s looming financial downturn to do so. As far back as 2015, experts in the financial sector have predicted that Canada was on a route to recession, if not worse. Three years after alarm bells have been unanimously rung, those warnings are closer to fruition than ever.

First, Canada’s dependence on oil, both to provide domestic jobs and as a precious resource within the nation’s export-dependent economy, has become a vulnerability. The sharp decline in oil prices has been a harsh reality for years now, but the Canadian government has not taken the necessary steps to ensure that its oil sector would be prepared or protected in the case of such a dip. Oil accounts for 6% of Canadian GDP, a disproportionate amount by most nations’ standards. Yet, several projects that would allow further growth or, at least sustenance, in the Canadian oil industry have been derailed by government spending in all the wrong places and a policy of appeasement. At a time when oil prices are volatile and suppressed, this could prove a massive misstep in both the short and long term.

Three major projects in the oil and energy sectors have been officially or potentially killed by misallocation of government funds. These projects – The Northern Gateway pipeline (costing $7.9 billion), the Pacific Northwest LNG project ($36 billion), and possibly the Energy East pipeline ($15.7 billion) – which would have qualified as long-term investments in infrastructure and economic growth, have been put on the back burner in favor of blatantly non-economic stimulating spending.

At a time when the global oil markets are hyper-competitive, such decisions regarding these pipeline projects is inexplicable. While the Trudeau government has attempted to strike a balance between environmentalism and maintaining its oil production – hence the 2016 approval of the new Trans Mountain pipeline but the rejection of the Northern Gateway pipeline – pundits have pointed out that environmentalists, who are most vocal in British Columbia, were never going to be accepting of such a balance. Predictably, the BC government has tied up pipeline expansion while it conducts further environmental studies, yet the Canadian government has vowed to continue with the project.

While Kinder Morgan’s Northern Gateway pipeline has the backing of the federal government, its future is far from certain. After all, other pipelines with federal approval have already been declared ‘dead’. Most notably, the $36 billion Pacific Northwest LNG project was done in by Malaysian energy giant Petronas, the company in charge of oversight. They cited “changes in market conditions” globally as reason for pulling out of the project. While Petronas cited only global oil prices as the reason for cancelling the project, which will mean a loss of thousands of expected construction jobs in Canada, critics of the NDP Party, which has been a vocal critic of liquid natural gas projects, blame a hostile attitude toward oil companies for the decision to cease the pipeline’s construction.

“[The Petronas spokesman] is telling the truth in regards to market conditions but he also, and his company also, have to do business in this country in the future,” said Jas Johal, a Liberal Party MLA. “So at the end of the day he is not going to come out and say directly that the NDP are responsible.” (Global News)

This case is an example of a greater exodus of investors from the Canadian oil market, the result of ever-burdensome policies even in light of conditional government support. The abandonment of carbon taxes and other environmental regulations which have precipitated the return of jobs and economic growth in the States have seen a reverse trend in Canada. While Justin Trudeau has maintained support for some Canadian pipelines, the federal imposition of taxes on carbon, as the Petronas case helps illustrate, means that there may be few pipelines to approve in the future. Pipeline squabbles in Canada are the rule since WWII, not the exception. But, between these new taxes and constant intervention from environmental-minded provincial governments, the crushing reality is that doing energy-related business in Canada has become unnecessarily expensive.

Canada’s economy can’t afford to impose self-inflicted blows upon its oil sector, as the reduction in energy and construction jobs is not even the most alarming threat to economic stability.

America, and the world over, knows the devastating effects of a massively overvalued housing market. Deutsche Bank reported in 2015 that the Canadian housing market was overvalued by as much as 63%, and rising interest rates, slowing housing prices and lagging wages and GDP have made this market even more volatile since initial reports. Housing-related debt as a percentage of household income in Canada is at its highest levels ever, according to the aforementioned report.

Meanwhile, uncertainty about government pension funds becomes even more urgent as steadily increasing taxation and government spending on programs under the Trudeau government take hold. The issue of pensions is so pressing that it has become a political platform of sorts, a hot enough issue that promises of more secure pensions may help re-election campaigns.

With tariff increases by America nearly certain to hit Canada – whose export economy relies heavily on its southern neighbor – more than virtually any other country, minimum wage hikes having eliminated an estimated 88,000 jobs in January alone, and many government policies aimed at inclusion and equality of opportunity as opposed to hard economic growth, there is a consensus that Canada faces uncertainty on a number of fronts.

And, perhaps most concerning of all, it will be up to the Liberal government to stop trying to appease all parties – namely its socially-concerned base – and to make difficult decisions that put limiting economic hardships first and foremost.