Several economists have forewarned that Canada’s poor economic growth is far from over, however, a new report is suggesting it may be here to stay for the next two decades.
Canadian financial firm Omnigence published a study that forecasts Canada is moving toward a “protracted bout of stagflation” that will drive the country into even higher inflation and continued low growth.
“It seems plausible that Canada will continue to experience stagnant real GDP/capita over the next two decades as the issues … are resolved before returning to the more historically typical growth trajectory,” said Omnigence director Stephen Johnston, who led the study.
Canada will likely see the lowest real growth of any country in the Organisation for Economic Co-operation and Development over the next three years, without factoring in the country’s population growth.
Johnston claims that Canada’s GDP per capita has already been experiencing “early onset” stagflation for nearly a decade, with the metric remaining stagnant since 2013 in relation to the U.S. dollar. A major precursor for economic growth is productivity, an area in which Canada has consistently fallen behind the U.S. over that same period.
Another problem is that Canada continues to lose capital, with more money leaving the country on an annual basis than coming in.
Canada is not only losing in areas of capital and productivity however, it’s also experiencing a housing shortage, currently short of three million houses needed, without a concrete resolution on the horizon.
Housing shortages naturally contribute to inflation, which diverts necessary capital away from more productive activities.
“Canadian investors need to seriously consider the potential effects of a protracted bout of stagflation on their investment holdings. On one hand, based on 1970s behaviour, the residential real estate market may be negatively impacted by stagflation – manifested via rising nominal interest rates – and perhaps even more so due to stretched valuations,” reads the study.
“On the other hand, Canada has a large and competitively priced universe of commodity and commodity-linked assets that can be expected to behave more positively in inflation/stagflation conditions, and which are also trading at conspicuously low valuations in relation to stocks and bonds.”
Canada has more investment in housing than any other country in the OECD, which makes it too reliant on real estate to boost its GDP growth.
“Simply put, Canadians spend far too much on housing, use excessive amounts of leverage to do so, at prices that are far beyond any reasonable interpretation of affordability,” said Johnston.
Canadians also have to face the challenges of the Trudeau government’s 2050 Net Zero targets, which demand enormous amounts of capital while increasing the cost of energy.
Transitioning to a greener economy is expected to generate some GDP growth, however, it will also increase inflation by 2% over the next decade.
The study suggests that investors put their money into lower-cost food chains, automotive maintenance and farmland, as these sectors will likely be the beneficiaries of long-term stagflation.
