Economy going over cliff

Stephen Harper’s Conservatives—the very people who claim they are the best political choice to put behind the wheel of Canada’s economy during difficult times—appear to be driving our economic bus over a fast-approaching cliff.
The warning signs are becoming more numerous and more severe. The Canadian economy is reeling from a skilled worker shortage and structural unemployment, and now is falling behind several other industrialized countries when it comes to economic growth.
What’s worse is that many other serious warning signs, specifically the high level of consumer debt and an overpriced housing market, also originate from within Canada.
Outgoing Bank of Canada Governor Mark Carney repeatedly has said throughout his tenure that, aside from a downturn in other major economies, excessive consumer and household debt are the largest domestic threats to Canada’s economic well-being.
The real problem, though, is the potential of a “superstorm” in the Canadian economy: a faltering domestic economy, with its own serious challenges, combined with any number of possible economic disruptions in our major export markets like Europe, China, and the United States.
Unfortunately, new domestic economic data released this past week suggests our debt load has never been higher and that our housing market is badly weakening.
The new information on consumer debt released by Statistics Canada found that average household debt in Canada now stands at a record 165 percent of our annual income.
Put another way, for every $1 we earn today, we are on average spending $1.65.
In short, Canadians are spending and borrowing too much and saving too little, which leaves our households vulnerable if an income earner loses his or her employment.
It also leaves the broader economy at greater risk if there are significant job losses as consumers then will be forced to reduce their discretionary spending and pay down this personal debt.
Consumer debt, including credit cards, loans, and lines of credit but excluding mortgages, stood at $477 billion at the end of 2012, so having to pay back as little as 10 percent of this debt will lead to a decline in spending and investment of about $47 billion throughout our economy.
Meanwhile, the housing market in Canada also is slowing dramatically. The real debate among economists now is whether or not the Canadian housing market is merely over-priced or in something called an asset “bubble.”
The distinction is a significant one as over-priced markets often can handle a small adjustment in pricing over time a longer time. A market with a bubble, however, risks rapid and unpredictable prices declines from a sharp peak.
The effect on the economy of a country with an over-priced market, which experiences say a 10 percent adjustment over a five- to eight-year period, can be minimal. But the effects of a bubble bursting, say a 20-30 percent price decline over three-five years, can be dramatic and lead to a deep and prolonged recession.
The last recession in the U.S., which was the longest and deepest since the Great Depression, is the best example of what can happen when housing and debt bubbles simultaneously “pop.”
It’s not pretty.
So what is happening in Canada’s housing market? Of this, there is little consensus. On the “dovish” side are analysts at some of the major Canadian banks, the Finance Department, and the Canada Mortgage and Housing Corp. (CMHC), who all see the market as overvalued but stable and unlikely to experience a major price adjustment in a short period of time.
On the “hawkish” side of things are analysts from international credit rating agencies Fitch and Moody’s, the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), and Capital Economics, who all see a de-facto bubble situation and steep downward price adjustments in the medium term.
The doves think the average housing price, which has declined each month for five months in a row, is moderating as planned.
The hawks, on the other hand, think the housing price declines we’ve seen, when coupled with declines in both housing starts and sales, is the start of something more as the bubble pops or deflates in the short- to medium-term.
It’s worth noting that none of these analysts see prices rising as they have in the past, and all are seeing some sort of price decline over the medium term.
An over-indebted population and overheated housing market are among the most significant threats to the Canadian economy today, and they are “Made in Canada” problems that have come to be under the economic management and stewardship of Stephen Harper’s Conservatives.
After eight years of “Economic Action Plans,” Canadians have little more than excessive household debt, a weakening housing market, massive federal deficits, and a struggling economy to show for it.
Some plan.