No more tricks up Canada’s sleeve: CIBC

Tapped out consumers and cost-cutting governments will weigh on the Canadian economy and lead the Bank of Canada to hold off on raising interest rates until 2014, according to economists at CIBC.

The economists do call the performance of the Canadian economy in the wake of the financial crisis “nothing short of remarkable,” but they say Canada has no more “tricks up its sleeve” to outperform once again.

“While growth should do well enough to avoid a new round of monetary policy easing, tapped out consumers and cost-cutting governments could see the Bank of Canada wait for a U.S.-growth-induced pick-up in 2014 before raising rates,” economist Benjamin Tal said in a report on Wednesday.

CIBC now expects the Canadian economy to grow by 2.1 percent over 2012 and 2013, while the federal government is calling for growth of 2.1 percent in 2012 and 2.4 percent next year.

While consumers in the U.S. have spent the last few years repairing household balance sheets, Canadian households have gorged on debt, sending the debt-to-income ratio to a record high. Those troubled balance sheets will be a drag on the overall economy, the bank says.

“Years of free-flowing credit in Canada has seen households overshoot by a wide margin what could be considered ‘normal’ consumption relative to population trends,” Tal says. “So after gorging at the table of plenty for several years, Canadian consumer appetites may already be satiated.”

And with low interest rates having been the norm for the last couple of years, consumers are experiencing what the economists call “low-rate fatigue.”

“The effective interest rate on household debt has been hovering at a record low for over two years, and has been on a clear downward trend for more than four years. As is the case frequently, the more a tool is used (in this instance, low interest rates), the less effective it is -- most evident in the credit market,” Tal says.

In the first half of the last decade a 100-basis point decline in interest rates resulted into a 2.1-percent boost in household credit growth. But more recently that same reduction in interest rates has resulted in a 4.1-percent pullback in credit growth.

“Today, credit growth continues to slow as the impact of low-rates stimulus is waning,” he says.

And the strong exports that have also helped the Canadian economy over the last couple of years may also begin to fade, Tal says.

“Rising U.S. auto sales have been a boon to Canadian exporters recently, but the lift to trade could prove fleeting given risks to stateside growth from a withdrawal of U.S. fiscal stimulus in 2013,” he says.

He says the impact of a slowdown in exports will be felt in the labour market. Of the 28,000 jobs created in the last six months, Tal says, almost all of those jobs have been created in the tradeable sector -- namely manufacturing and natural resources, which both depend heavily on foreign demand.

“While healthier U.S. industrial production and vehicle demand have spurred the run-up in Canadian factory headcounts seen thus far, a continued slowdown in emerging markets and risks of a sharp contraction in U.S. government spending could dent hiring plans through 2013, leaving the jobless rate still running above 7 percent that year,” he says.