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What is this Jekyll and Hyde economy about?

Amid growing concerns about the global economy there are also some concerns about the seeming Jekyll and Hyde economy of Canada. At first we are experiencing growth and then predictions change or are down-graded or changed altogether making keeping track of what is really going on less easy to figure out.

The recent decision by Federal Reserve chair Janet Yellen’s to indicate that she will be in a position to raise the Fed rate in July has caused some commotion, especially here in Canada. If the Fed does raise their rate in July (and there are many who believe they will reverse that decision or at least change the tune when July draws closer) it will have a large impact on Canadians as the rate hike will have a substantial effect on the commercial lending rates here in Canada.

With the record debt loads that Canadians are currently carrying, an amount of debt that exceeds U.S personal debt with regards to debt to GDP ratios that rate hike could have a significant effect and will certainly be felt here north of the border. Another very scary aspect of this rate hike and the subsequent effect it will have in Canada pertains to our housing market.

The gloom and doom predictions of a coming housing bubble collapse have been heard far and wide for several years but they have never picked up the steam they deserved as the economy seemed to be somewhat stable and the growth predictions seemed to alleviate any fears. Now with the potential rate hike by the Fed causing some eyebrows there are serious concerns that Canadian housing has reached its peak and that there could be a decline coming.

At a recent Milken Institute conference Bank of Canada Governor Stephen Poloz issued a veiled warning that “there is a crater under every bubble” meaning that if it is determined that Canadian housing is in fact a bubble whose time has come than the landing if it bursts may be quite harder than we fully anticipate. The Canadian economy has also taken a very large hit with the continuation of the very low oil prices we have experienced in the last year. The damage this has done to the housing market in oil rich provinces is now beginning to be felt. Of the three biggest housing markets in Canada, Toronto, Vancouver and Calgary, Calgary has already begun to feel some correcting of an overvalued market and there is fear that Toronto and Vancouver will soon feel the same.

Another economic driver for Canada has always been our manufacturing base and the hopes that a weaker dollar would spur some resurgence has failed to materialize. And with oil prices now taking the loonie higher those expectations are becoming less and less feasible.  The jury is still out on what may or may not occur in our Jekyll and Hyde economy the certainty is, is that there is no certainty at all.

 

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