Experts warn of overreliance on several tailwinds, as well as increasing pressure from two long-term factors
The Canadian economy is entering 2020 in much worse shape than many investors realize, facing risks that could grow more significant over the coming decade.
That’s the conclusion shared by a money manager at one of the world’s largest investment firms and a new report released by one of Canada’s biggest financial institutions.
In an interview with BNN Bloomberg, David Wolf, portfolio manager in the global asset allocation group at Fidelity Investments, said that the Canadian economy is carrying more risk than many investors think, particular as it relies excessively on consumer spending, housing prices, and household debt.
“Those areas are starting to wobble,” said Wolf, who is also a former advisor to the governor of the Bank of Canada. After adjusting for inflation, retail sales have declined by the largest amount since 2009, he said.
“There’s not much left to sustain … the economy,” he added, citing a spike in consumer delinquencies and bankruptcies — which threaten Canada’s banks in particular — along with weak business investment and export figures. Rising real estate values were another concern that has prompted his company’s funds to underweight Canadian investments.
“I’m not saying we’re going to have a big recession,” Wolf said, clarifying that the timing of such risks materializing into real weakness is uncertain. “As fund managers we want to be prudent, we want to be diversified, we don’t want to take risks where we don’t have to, and that’s why we’re looking abroad.”
Meanwhile, economists from RBC warned that the twin forces of climate change and an aging population will increasingly shape Canada’s fate over the next decade.
“By 2030, Canada's economy could look significantly different,” the economists said in a report titled Navigating the 2020s.
With 650,000 people projected to be living in Canadian seniors’ residences by 2030 — up from 450,000 today — they forecast that the extra capacity would cost at least $140 billion to build. Rising healthcare costs and a greater need for elder benefits will put pressure on governments, as well as working-age Canadians; the ratio of youths to seniors will fall from 2.3 in 2010 to 1.7 in 2030, the report said.
“Canada's investment in pollution abatement and control increased tenfold in the past decade and will demand even more resources in the 2020s,” it continued.
The outlook included growing urgency with respect to the problem of climate change, which could influence Canadian farmers' crop choices, put strains on ports and coastal roads, define the location of new residential developments, and drive up insurance costs.
Citing a recent Canada Energy Regulator study, the report also predicted reductions in emissions intensity as electricity generation needs shift from coal to natural gas.
And while domestic demand for oil and refined petroleum products is expected to decline as a result of increased transportation efficiencies, oil production is expected to swell from 4.9 million barrels per day in 2020 to 5.7 million bpd in 2030 due to rising exports, according to the RBC report.
