1.) They depend on energy exports to the US. With the US now ramping up production, we need less Canadian energy.
2.) A strong currency has curbed exports.
3.) The housing market is overvalued
4.) Unit labor costs in manufacturing are high
5.) Mexico is now the leading exporter to the US
6.) They have a large current account deficit.
FT had an article last week that highlighted the problems in the consumer market and the real estate market. Consider this chart from the article:
The top left chart of housing prices looks like the US housing price chart before the crash. And the continued increase in household debt does not bode well for the future. Remember that one of the reasons for the slow pace of the US recovery is that consumers are paying down debt which is slowing their spending. At some point, Canada will undergo the same situation, leading to a long-slow period of growth.
The IMF has been warning about the Canadian market for some time. Form the same article:
House prices, meanwhile, rose 23 per cent in the three years to April 2012. The International Monetary Fund has been warning since 2011 that Canadian homes looked overvalued, because the ratios of house prices to incomes and to rents were respectively 20 per cent and 29 per cent above their long-run averages.
And consider the slow pace of Canadian growth, as shown in the following chart:
For the last five quarters, Q/Q growth rate has been at the most .5% -- very slow.
And the annual pace of growth is slowing:
Real GDP expanded 1.8% in 2012 after growing 2.6% in 2011. Final domestic demand was up 1.9%, following a 2.7% increase in 2011.
Finally, consider the lop-sided nature of domestic investment:
Business investment in residential structures advanced 5.8% in 2012, three times the pace (+1.9%) set one year earlier. New home construction was up 12.8%. On the other hand, business investment in plant and equipment (+6.2%) grew at a slower pace compared with one year earlier (+10.4%).
It appears that our neighbors to the north are starting to have some fairly serious problems.
