David Rosenberg: Canada loves people — businesses, not so much

A bull market in population growth and a nothing-burger for the economy

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First, the good news: Canada’s economy closed 2024 in slightly better shape than was expected, with real gross domestic product growth inching up to a one per cent annual rate (consensus was 0.8 per cent) in the fourth quarter, while the third quarter was revised to a “less negative” print of minus 0.5 per cent from minus 1.1 per cent in the initial report.

But try as I may, I can find nothing positive to say about the Canadian economic backdrop stemming from Statistics Canada’s report.

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Keep in mind that because of the ongoing immigration boom, a vote-getter for the Justin Trudeau government, the population expanded at a 3.1 per cent annual rate in the fourth quarter and that followed a 3.3 per cent pace in the third quarter. What that means is that real per capita GDP contracted at a two per cent annualized rate in the fourth quarter after having tumbled 3.7 per cent in the third quarter. For 2023, the Canadian economy on this basis contracted 1.2 per cent.

Real Canadian GDP

The level of real GDP per capita, I am sad to say, is no higher today than it was at the end of 2014. There is a bull market in population growth and a nothing-burger for the overall economy. Going back five decades, declines in real population-adjusted economic activity have only occurred in “official” recessions. The Bank of Canada has run out of reasons, beyond being scared of its own shadow, to stick with its unduly tight policy stance.

Not just that, but all the modest growth and then some in the fourth quarter came from the foreign-trade sector (partly reflecting the easing in supply chain bottlenecks): the combination of higher export volumes (5.6 per cent at an annual rate) and lower imports (minus 1.7 per cent in a signpost of weakening demand pressures) was the story behind the ‘plus’ sign in the top-line GDP figure.

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Consumer expenditure was soft at one per cent. The once-hot residential sector shrank for the third quarter in the past four, at a 1.7 per cent annualized rate. The commercial sector is in disarray (blame empty office space) as non-residential construction plunged at an 11.6 per cent annual rate on top of the 14.3 per cent slide in the third quarter — the worst back-to-back performance since the spring and summer of 2020 when the economy was on pandemic alert and in lockdown mode.

The real key nugget in this fourth-quarter report is that real final domestic demand dipped 0.7 per cent quarter-over-quarter annualized and has shown absolutely no pulse at all in the past three quarters. The year-over-year trend that was running on government stimulus fumes at 4.6 per cent two years ago was subsequently pared to one per cent a year ago and is now down to a microscopic 0.6 per cent. There is no lipstick in any cosmetic section in any department store that you can paint on this pig.

The ongoing drag from relentless declines in business capital spending is a true sore spot and a huge weight on productivity: volume spending on machinery and equipment contracted at a 5.7 per cent annual rate and has now shrunk in five of the past six quarters. The level of capex spending in Canada is all the way back to where it was in the third quarter of 2020, and before COVID-19, you have to go all the way back to the third quarter of 2017 to see such a depressed level of business spending on supposed productivity-enhancing equipment.

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Just to show you that I am not exaggerating, the level of business capex in this country is no higher today than it was two decades ago. This is a true crisis and is why the Canadian dollar is stuck in the sick bay. What Canadian businesses are doing instead of investing locally is taking their capital and deploying it in other geographies where that capital is welcomed. In Canada, we have a government that loves to attract people, but physical capital that generates future productivity growth? Not so much.

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The December GDP reading also disappointed, coming in flat instead of edging up 0.2 per cent as expected. That said, Statistics Canada is estimating a 0.4 per cent January pickup as the striking Quebec teachers left the picket lines and headed back to the classrooms. The “build-in” for first-quarter real GDP growth is running at a 1.8 per cent annual rate, but remember,

David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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