January 20th, 2014
Our neighbor to the north is facing some headwinds. In Canada, there are troubles developing that may drive the country toward an economic slowdown. In 2008, the ripple effects from the U.S. economy into the global economy caused an economic slowdown in many countries. The Canadian economy was one of the few nations that didn't suffer a major hit; it was able to stand strong.
Now, Canada may not be able to stay on such strong footing, as it faces a possibly severe economic slowdown due to a few phenomena that are starting to line up to create a perfect storm.
First of all, the housing market in the Canadian economy is becoming much overvalued. According to Deutsche Bank, the Canadian housing market is the most overvalued housing market in the global economy. Looking at the value of the Canadian housing market as a ratio of home prices and rent, this market is overvalued by 88%. (Source: Babad, M., "Canada's housing market most overvalued in the world, Deutsche Bank says," The Globe and Mail, December 11, 2013.)
As we move through the beginning of 2014, the Canadian housing market is showing signs of a slowdown. Building permits, one of the early indicators of which direction the housing market is headed, saw a 6.7% decline month-over-month in November. (Source: "Building permits, November 2013," Statistics Canada web site, last accessed January 9, 2014.) If the housing market soon faces troubles and prices decline, a major economic slowdown could follow.
Secondly, the employment situation in Canada, another indicator of an economic slowdown, is becoming dismal. In December, Canada's unemployment rate increased by 0.3% to stand at 7.2%. Jobs growth in the country was also very anemic in 2013. On average, 8,500 jobs were added each month in 2013. In 2012, this number was 25,900. The jobs growth rate has declined by more than 67% year-over-year. (Source: "Labour Force Survey, December 2013," Statistics Canada web site, last accessed January 10, 2014.)
Thirdly, household debt in Canada continues to increase, recently hitting an all-time high. In the third quarter, household debt compared to disposable income in Canada stood at 163.7%; in the second quarter, it was 163.1%. (Source: "Canadian household debt ratio climbs to record in third quarter as mortgage borrowing hits $1.13-trillion," Financial Post, December 13, 2013.) Of course, increasing household debt could take the Canadian economy into an economic slowdown, because as households gather more debt, they have to make higher payments to service the debt, which causes a slowdown in consumer spending.
Last but not least, crude oil prices have been declining since September of 2013. Canada has become a major producer of oil. If oil prices remain suppressed, profitability declines, forcing producers to make changes to their operations, which could include mass lay-offs to control expenses. This could send the country toward an economic slowdown, as well.
But what does an economic slowdown mean to American investors?
If the Canadian economy does go through an economic slowdown, the value of the Canadian dollar could decline. American investors can profit from this by shorting such exchange-traded funds (ETFs) as CurrencyShares Canadian Dollar Trust (NYSEArca/FXC). This ETF tracks the performance of the Canadian dollar. By shorting it, investors will be able to profit when the Canadian dollar goes down in value.