Market Update: October 24th, 2023
Canada vs. The US - The Tale of Two Different Economies
Both countries are similar in demographics, and bi-polar politics, both have a liberal/democratic government, both have similar education levels, and we are similar in so many ways. If this is the case, why is the US economy remaining strong while the Canadian economy weakens?
Right now, we are seeing a separation between the US and Canadian economies as Canada inches towards recession while the US remains strong. A great example of this is the recent trend in the CAD vs USD currency exchange rates:
Topics
Sector Diversity
Sensitivity to Interest Rates
Sector Diversity
On the “Credit” side or the side that adds to GDP, the sector diversity in the US is far superior that in Canada. In Canada, there are three main sectors Financial/Real Estate, Energy, and Services. With heavy weighting in just these areas, when those areas are weak Canadian economics are more sensitive.
In the US, there is great diversity between sectors, below is a pie chart showing all the robust sectors that they have.
This is a stark difference to Canada’s economy which relies on just a few sectors to contribute to GDP.
In Canada, 25% of our GDP is tied to the public sector and a whopping 36% of our GDP is tied to real estate in some way.
The public sector (healthcare, education, government, etc.) is very sensitive to inflation as their salaries are fixed with fixed increases (if any at all).Therefore, when prices go up their disposable income drops, and if loan payments increase then disposable income once again decreases.
It is no secret that the real estate industry is tied to interest rates and inflation. As inflation increases the cost of real estate climbs putting pressure on construction and renovations. In addition, if interest rate sincrease this has a large effect on the cost of borrowing. When was the last time you heard of a real estate project funded with nothing but cash? This is unheard of and primarily how banks make money by lending on real estate.
As you can see the rise in rates affects Canadians significantly more than Americans because of our concentrated GDP and their more diverse GDP. Therefore, the US can hold GDP stronger than Canada can and you are seeing thatin the numbers
Sensitivity to Interest Rates
This has never been a large issue because rates have always been low, but Canadians are far more sensitive to interest rates than Americans. The main reason for this is their mortgage structure. Canadians typically have a 5-year mortgage while Americans typically have a 30-year mortgage.
The term of our mortgages has a very drastic impact on the effect on consumers. While the US consumer continues to spend the Canadian consumer is tight. This is because even with the increase in interest rates 90% of Americans have not had their mortgage affected by the higher rates. In Canada, this number is closer to 50%.
Summary
Canada and the US are structurally shaped differently even if the demographics are somewhat the same. But, unfortunately in Canada, we have a far greater sensitivity to interest rates than in the US. We are both very similar in that much of our debt is on our homes but 90% of Americans have NOT felt a difference in their mortgage, while 50% of Canadians have. Couple this with our jobs are heavily affected by interest rates with over 50% of our GDP with either fixed income or tied to real estate, the effects are far more in Canada.
Thank you,
Justin, Konrad, and Merriel
More articles and information are available at www.lkwealth.ca
Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research
Disclaimer: This newsletter is solely the work of Justin Lim and Konrad Kopacz for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.
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