Resource Sector Woes Hold Canadian Economy Back While US Outperforms

December 24, 2019 Updated: December 25, 2019

The Canadian economy is ending 2019 with a whimper as job losses pick up and GDP growth slows. Government estimates project the economy growing 1.7 percent in 2019. This is hardly spectacular growth but it’s close to the economy’s potential—especially in the non-oil-producing regions.

Canada’s resource sector is lagging that of the U.S. economy due to a hostile regulatory environment and higher taxation. U.S. tax reform and deregulation have tilted the playing field further away from Canada’s oilsands and capital investment has moved south.

The Bank of Canada expects the oil and gas sector’s share of total business investment to be about half of what it was in 2014, before the sharp drop in oil prices. Yet Canada’s highest incomes come from capital-intensive sectors like oil and gas, which are crucial for improving productivity.

Alberta’s unemployment rate is 7.2 percent, compared to the national average of 5.9 percent. It used to be 5 percent lower than the national average prior to the 2014 oil price crash.

Jack Mintz, president’s fellow at the University of Calgary’s School of Public Policy, points out that from January 2017 to November 2019, employment fell 3.2 percent in mining and oil and gas in Canada compared to a massive 14.9 percent increase in the United States. “The U.S. promotes energy development while Canada is hostile to it,” he wrote in a Financial Post op-ed.

The Canadian consumer is also on much weaker footing than the U.S. consumer. Canadian households are saddled with debt, and even with a decent job market for most of 2019, it’s not nearly as strong as the one south of the border, where unemployment is at 3.5 percent.

One bright spot in the Canadian economy is the firming of the housing market. The impacts of the mortgage stress test appear to have been digested as low mortgage rates encourage buyers to get involved.

Throughout 2019, the Canadian economy has faced uncertainty from U.S.-China trade tensions, which have crimped business investment and exports. Globally, over 35 central banks have cut rates or taken other actions to spur their respective economies. 

Of note, the Bank of Canada did not cut rates even as the U.S. Federal Reserve did so three times to stabilize the U.S. economy. With the world’s most powerful central bank in an accommodative mood, stock markets have soared in 2019 and Canada’s benchmark TSX is up nearly 20 percent and set a record high on Dec. 23. The S&P 500 is up nearly 30 percent. The loonie has gradually strengthened throughout 2019 from about US$0.73 to US$0.76. 

Government spending and a better global trade outlook with positive vibes coming on the USMCA and U.S.-China fronts are expected to provide some offset to the recent weakening in the economy in 2020. The government forecasts growth of 1.6 percent next year.

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