David Rosenberg: The Canadian economy is mired in weak fundamentals and investors are taking note

David Rosenberg is the individual who established Rosenberg Research and has written the daily economic report known as Breakfast with Dave.

The value of the Canadian dollar has significantly dropped below 74 US cents, returning to its late May position. During that period, oil prices were around US$68 per barrel, whereas now they stand close to US$80. Similarly, the CRB index, which monitors commodity markets, was at 540 in May and has slightly increased to 550. Consequently, it is evident that the Canadian dollar has reverted to its previous rate from three months ago, despite the fact that commodity prices were lower at that time compared to the present.

This indicates a decline in the country's economy, and it is fully justified.

In the last three months, there has been a drop in job opportunities twice. Additionally, the number of hours worked per week has remained the same between March and July. As a result, the rate of people without jobs has increased by 0.6% from its lowest point to reach 5.5%. This suggests that a recession is on its way.

In the meantime, the actual GDP for June has decreased and the trade situation has recently changed from being in surplus to being in deficit. Additionally, the previously booming housing market is now exhibiting clear indicators of slowing down. If we disregard the significant increase of 30.6 percent in mortgage interest expenses compared to the previous year, the overall inflation rate stands at 2.4 percent, which is close to the target. Meanwhile, the core index shows an inflation rate of 2.3 percent.

Meanwhile, the Bank of Canada is indicating a further increase in interest rates, which seems absurd but is likely to be the final one within this economic phase.

In terms of the overall view, the Canadian economy is stuck in a situation where its basic principles are not strong. The situation with the budget is uncontrollable, and there is a lack of serious effort in Ottawa to encourage financial stability. Despite a seemingly positive 1.9% increase in real GDP growth compared to the previous year, this is overshadowed by the fact that the population is growing at a rate of 2.4% annually due to increased immigration. Consequently, when we consider the economy on a per-person basis, it is actually shrinking by 0.5% on an annualized basis.

The actual issue with the national economy lies in its structure. There is an excessive dependence on consumer expenditure, which has increased by over 20 percent over the previous decade. Housing, on the other hand, has experienced a growth rate closer to high single digits. These sources of growth do not contribute to productivity. Both investments in machinery/equipment and construction of new facilities by businesses have decreased by 10 percent each in the last 10 years. The spending is concentrated in the wrong sectors of the economy, failing to generate long-lasting positive multiplier effects.

It's astounding to see that there has been absolutely no development in these fruitful sectors of the non-governmental part during the last ten years. This situation is a result of a government that lacks the determination to encourage investment in capital through the tax and regulatory systems – instead, their focus is on redistributing the nation's income. Consequently, productivity in Canada has declined by 1.4 percent compared to the previous year, and has consistently shrunk for four quarters in a row and in 10 out of the last 11.

Canada is lacking something crucial, and it's quite disheartening because the growth of productivity is essential for the future success of the economy. Unfortunately, what the government in Ottawa has chosen to do is mask this issue by implementing an immigration program that is the most forceful since the construction of the transcontinental railroad by the CPR in the late 1870s.

This doesn't mean that immigration is undesirable. However, its rapid speed does complicate the situation of inflation, particularly in the housing sector. On the other hand, productivity enables noninflationary growth and greatly simplifies the task of the Bank of Canada.

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