The 4th quarter of 2018 revealed some interesting cracks in the foundation of the Canadian economy that could warrant caution ahead.
- Gross Domestic Product (GDP) growth slowed to 0.4% in Q4, the smallest reading since Q2 2016, down from 2.0% in Q3
- Investment spending was down 11%
- Consumer spending growth slowed to 0.4%
- Inflation growth was down to 1.5% y/y in February, the slowest rate in more than two years
We are seeing dark clouds on the horizon for the Canadian consumer. Debt is taking an increasingly bigger bite out of families disposable incomes. The Debt-Service Ratio (Portion of household income devoted towards principal and interest payments on debt) reached a record high of 14.9% in Q4. On the other hand, the Debt-to-Income Ratio hit a new record high of 174%.
As you can see in the chart below, the Canadian Dollar is currently trading at around 75 cents to the US Dollar, but the incoming data suggest it could trend lower from here. As it is usually the case with economic forecasts, there are a multitude of opinions out there. The most extreme forecast that we have come across came from David Wolf, former advisor to the Bank of Canada governor. He believes we could see the Canadian dollar dropping to its 2002 record lows of 62 cents.
“The Canadian economy has some pretty significant headwinds at this point”
“A weakening of the currency would be part of the solution in a sense, in dealing with the imbalances that have built up in the economy”
“The stars are aligning in the other direction”
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