I’m not sure if you’ve been paying attention but the Canadian economy has been making a ton of headlines. These stories have been so big that they are making the front pages of newspapers and leading newscasts on TV.
The average person probably doesn’t keep up with news in general but here’s a few things that have happened to the Canadian economy recently in plain English.
The Bank of Canada (BoC) recently lowered the overnight lending rate to .75% from 1%. This news was significant because it came out of nowhere. No one was expecting a rate cut. For the last few months the BoC was warning about an increase in rates so when this cut came, it shocked everyone.
The BoC basically admitted that the Canadian economy is crap and it needs to be stimulated. By lowering interest rates, borrowing money becomes cheaper; in theory, the more we borrow the more we’ll spend. Sounds great but when you consider how much debt Canadians currently have maybe we should take this time to pay down our debt as Rob Carrick of The Globe and Mail suggests.
To simplify things, the Canadian dollar dropped in value because investors want a higher return. Why hold onto our Canadian bonds when we can get a higher return on U.S. bonds? So as demand for the Canadian dollar decreases, there’s an increase in the U.S. Dollar.
I’m not suggesting we bail on our investment strategy, I’m simply explaining what happened. What’s worth noting is that the Euro has also devalued quite a bit as of late. So although the Canadian dollar is weak against the U.S., there’s some great value if you’re planning a trip to Europe.
You know Canada isn’t doing well when you’ve got retailers like Target and Sony pulling out of the market completely. Their business practices may have been dodgy at best but the point is, there will be massive job losses. Target alone is cutting more than 17,000 jobs and don’t forget that Sears has already made cuts.
Come 2016 there will be a few new players entering Canada including Nordstrom’s and my personal favourite Uniqlo, but right now the economy is hurting. It’s a tough time for job hunters.
In theory, interest rates on mortgages will drop but lenders don’t need to follow the BoC. As of this writing, none of the big banks have lowered their rates. Royal Bank did shave 10 basis points off their 5-year fixed rates, bringing it down to 2.84%, but that was based on bond rates.
Even if lenders do decide to lower their rates, I would expect to see real estate prices continue to increase as Canadians pick up more debt. Don’t forget the Bank of Canada has already warned that house prices are overvalued by up to 30%.
Lower gas prices is great news for everyone, right? Not exactly, Canada is an exporting country; the lower oil prices hurt the Canadian economy. Jobs in Alberta are being cut; home listings have skyrocketed, while sales have dropped. Things could get ugly fast in Cowtown.
Also note that the province calculated its budget when the cost of oil was much higher. Their revenue has dropped 40% and there have already been rumours of tax increases.