Canada is “a flea on the back of an elephant”, says John Stephenson of First Asset Investment Management. “We’re levered to global growth through our commodities.” That may explain why Canada has just reported an annualised fall in GDP of 3.4% for the fourth quarter of 2008. That’s not as bad as America’s drop of 6.2%, or Europe’s 5.9%, but it’s still the worst figure since 1991. Exports fell for a record sixth successive quarter as the American and global economies slumped; around 33% of Canada’s GDP stems from exports to the US, the biggest importer of its northern neighbour’s oil and gas. And household spending eased as nervous consumers kept their wallets shut.
It sounds bad, says Lex in the FT, but in fact Canada is in far better shape than other major economies. For starters, guess which country, alone in the industrialised world, has not faced a single bank failure? “Yup, it’s Canada”, which has been “remarkably responsible” over the past decade, says Fareed Zakaria in Newsweek. In October the World Economic Forum deemed the Canadian banking system the world’s healthiest.
Canadian banks have raised plenty of capital to offset their comparatively modest losses on toxic securities. And the ratio of deposits to total liabilities for the sector is 70%, compared to under 50% in America and Europe ex-UK. Canadian banks are typically leveraged at 18 to 1 (so there are $18 of debt for every $1 of equity), whereas the equivalent American and European figures are 26 and 61 to 1, says Zakaria.
Strict regulation and a “conservative culture” have made the banks “the envy of the world”, says Christopher Mason in the FT. In Canada, “they will lend you no more than 75% of the value of your house”, adds Laurence Booth of the University of Toronto, so the housing boom never bubbled out of control. Prices have fallen by 12% from their peak so far – half the American slide – while Halkin Services points out that less than 0.4% of mortgages are more than 90 days delinquent, compared to 2.2% in the US. Households are also less indebted, with the ratio of debt to net worth at 21%, rather than America’s 28%. Banks continue to lend too: growth in business loans by commercial banks over the past three months has slipped below zero in America, but is up 9% in Canada, says Halkin.
The Canadian dollar has tumbled to around 78 US cents from above parity and the government has plenty of room to fend off the slump. A C$49bn stimulus package will push the budget into the red for the first time in 13 years, but public debt fell to 23% of GDP last year, the lowest in the G7. All this has fuelled hope that the downturn will be “less acute” in Canada, says Lex, and suggests that the country is well positioned for the return of the good times.
But that, along with a durable rebound in the commodities-heavy Canadian stockmarket – down by over half from its early 2008 peak – depends on a recovery in America and elsewhere. This still looks some way off. If there’s no sign of global growth, “stocks will be poor”, says John Stephenson. It’s too early to anticipate the next bull market, but Canada is a future recovery play worth watching.