Anchored by its world-class branch banking system, Canada was able to dodge or at least defer the most profound damages from the Great Recession back in 2008. This time around in 2020, however, several key business cycle indicators are flashing red for Canadians and their country.
Granted, Canada’s Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis did expand at our latest report in October 2019 via a 3.4% annual increase. But bear in mind that business cycle slowdowns typically happen within roughly 8 to 16 months from a peak in a country’s GDP.
GDP tracks a long-term growth trend via business cycles of growth or recession that repeat approximately every 5 years or so, albeit that no two business cycles mirror the same duration or size. America’s National Bureau of Economic Research states that there were 33 business cycles from 1854 to 2009.
Also, cyclical indicators are erratic with multiple major influences. Even more confusing is the fact that no consensus exists for which indicators universally trigger business cycles in all cases or whether a Black Swan anomaly will cause the next economic meltdown.
To impose some structure on this chaos, The Economist organizes its benchmarks into 3 critical categories: leading indicators that turn in advance of a cycle change; coincident indicators that define when the overall business cycle turns; and lagging indicators that top out following a business cycle.
Canada’s Leading Business Cycle Indicators
Albeit Canada’s prime lending rate remains fixed at 1.75%, 2 of the other selected 5 leading indicators below declined over the 12 months comprising the latest reporting period. Both consumer confidence and passenger car purchases in Canada dropped, the latter representing sales of a major durable good and a notable for its dramatic double-digit setback.
The Economist estimates that an economy hits its highest level about 8 to 16 months after business and consumer confidence starts to drop. There are shorter timeframes in advance of an economy’s GDP peak for slowdowns in car sales (6 months) and building permits (2 to 3 months).
- Interest rates: 1.75% at Jan. 2020 (no change from one year earlier)
- Business confidence: 57.3 points at Jan. 2020 (up 13.2% from 50.6)
- Building permits: 5,998 at Dec. 2019 (up 26.7% from 4,400)
- Consumer confidence: 51.5 at Jan. 2020 (down -4.84% from 54.12)
- Retail sales: Up 1.98% at Nov. 2019 (up 1.6% from up 0.38%)
- New car sales: 22,433 vehicles at Jan. 2020 (down -17.2% from 27,084)
Business confidence is an indicator based on opinion surveys revealing how pessimistically or optimistically business managers perceive their companies’ future potential and therefore can anticipate turning points in economic activity. In contrast, consumer confidence measures public opinions on standardized questions about household finances, a country’s economy in general as well as plans for major purchases on durable products lasting over a year or buying a home or an automobile.
Building permits mean official authorizations required before new building construction can proceed. Building permits are a leading macroeconomic indicator for both country and global business cycles. Typically, construction work starts immediately after a building permit is granted.
Retail sales refers to an aggregate measure of the percentage change in the retail sales index against the same month in the prior year. It measures consumer demand for finished goods and is considered a major macroeconomic indicator of whether an economy is moving towards contraction or expansion. Retail sales focus on volume changes only and exclude price level movements.
Canada’s passenger car sales metric shows a dramatic deterioration perhaps weighed down by heavy consumer debt, declining credit and uncertain employment prospects. That metric specifies the number of new passenger cars sold irrespective of price.
Canada’s Coincident Business Cycle Indicators
Percent changes in Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis are much-scrutinized headline numbers that define whether an economy is contracting or expanding. That’s because year-over-year GDP changes coincide with and thus signal the start of a recession or boom period.
The latest GDP on a PPP basis statistics reveal that the Canada’s economy is performing OK for now.
- GDP: US$1.9 trillion at Oct. 2019 (up 3.4% from $1.838 trillion)
- GDP per capita: $50,725 at Oct. 2019 (up 2.1% from $49,690)
Please note that Canada is the world’s 16th biggest economy. Its share of the world’s overall GDP of $141.860 trillion was 1.3% at October 2019, down from 1.4% one year earlier.
In addition, Canada’s GDP per capita income of $50,725 is over 2.5 times greater than the global average GDP per person of $18,391 as of October 2019.
Canada’s Lagging Business Cycle Indicators
Ominously, Canada’s critical capital investment to GDP ratio fell from 2019 to 2020 so far. The other 2 lagging indicators–namely unemployment and inflation–also worsened compared to the same metric in the prior year.
Usually capital investment shadows a country’s GDP peaks and valleys via a 12-month delay. Both inflation and unemployment accelerate about 6 months after GDP reaches its maximum growth.
- Capital investment to GDP ratio: 22.45% in 2020 (down -0.13% from 22.58%)
- Unemployment rate: 5.999% in 2020 (up 0.205% from 5.794%)
- Inflation rate: 1.926% in 2020 (down -0.306% from 2.232%)
The ratio of capital investment to GDP is a lagging but future planning-oriented indicator. It records the value that a country spends on capital development and infrastructure projects divided by its overall GDP output on a PPP basis.
Unemployment rate is a percentage based on a country’s total labor force, not its full population. It is a critical metric since many mortgage holders experience severe difficulties paying their debt obligations once they become jobless.
Inflation rate documents the percentage change in average consumer prices in a country over a one-year period, and measures cost-of-living.
Research Reference Materials:
Forbes, Recession Is Overdue By 4.5 Years, Here’s How To Prepare. Accessed on February 12, 2020
MarkLines Automotive Industry Portal, Canada Flash report, sales volume, 2019. Accessed on February 12, 2020
National Bureau of Economic Research, US Business Cycle Expansions and Contractions. Accessed on February 12, 2020
The Economist, Guide to Economic Indicators: Making Sense of Economics (7th Edition). Accessed on February 12, 2020
Trading Economics, Canada Chartered Banks Prime Lending Rate. Accessed on February 12, 2020
Wikipedia, Consumer confidence index. Accessed on February 12, 2020