2010 was a good year, but from all the gnashing of teeth, it didn’t seem that way. The world had narrowly escaped another Great Depression, only experiencing the Great Recession. The financial crisis emanated from a U.S. housing crash, quickly spreading to Europe and around the world.
Canada stood strong, and by comparison, the 2008 recession was relatively mild compared to 1980-82 and 1990-91 recessions. Canadian unemployment reached 8.7 per cent vs. 13.1 and 12.1 during these previous downturns. Canada was looked upon as a bastion of financial stability in a shaky world. Our federal fiscal position was excellent, having run surpluses for many years prior to this crisis, cutting our debt to GDP ratio from 70 per cent down to 30 per cent. This provided our feds the financial flexibility to appropriately manage the recession. In 2010 Canada was strong and the U.S. was a basket case.
How the world has changed!
Out of the ashes the U.S. surged, and Canada faltered. Since 2010 the U.S. economy has grown by 42 per cent, almost double Canada’s 24 per cent growth. World economic growth for the past decade has been driven by the U.S. and a select few emerging markets. India’s economy is double that of a decade ago, China was up 73 percent.
There is only a loose connection between GDP growth and stock market performance. However, during the last decade, the U.S. market has rewarded investors with a total return of 255 per cent, vastly superior to the TSX’s 95 percent.
How could one of the then-strongest economies in the world do so poorly, and one of the weakest do so well? There are multiple intertwined reasons, without definitiveness. Here is my list:
- America remains one of the freest markets in the world. Free markets drive efficiency and innovation. With a few notable exceptions, the U.S. allowed the bankruptcy and healing process to occur quicker with less protection than most countries. U.S. per capita GDP grew 12.5 per cent in the decade to 2018, whereas Canada’s per capita GDP grew 6.0 per cent until mid-decade but has almost flat-lined since then.
- Markets factor in relative strengths and weaknesses. The Canadian stock market was trading at a 20 to 25 per cent premium to the U.S. market a decade ago. Because of our relatively stronger economy and fiscal situation, investors were willing to pay more for every dollar of Canadian corporate earnings. Today, because investors “know” the U.S. is strong and Canada is weak, investors pay 20 to 25 per cent more for every dollar of U.S. corporate earnings than Canadian earnings. That’s a 40 to 50 per cent valuation swing over the decade.
- World-leading U.S.-based technology companies have represented an outsized percentage of U.S. market growth. The FAANGs (Facebook, Amazon, Apple, Netflix and Google) along with a few others like Microsoft, Visa and MasterCard are up five to over 10 times in the decade. Canada has some smaller companies with fast growth like Boyd Group, Alimentation Couche-Tard, Enghouse and Constellation Software but those aren’t exactly household names. Valiant (now Bausch Health) briefly had a market cap larger than Royal Bank then flamed out. Our currently most famous tech company, Shopify, has a price tag of $537 and a market cap larger than BCE Inc. but perpetual losses.
- Resources remain a key Canadian economic driver, suffering from both challenging commodity prices and self-inflicted wounds.
- Canadian business investment has been abysmal at about half of U.S. growth, partially explaining low growth in per capita GDP.
Canada’s tepid GDP growth comes from a dramatic increase in immigration, excessive residential investment, government deficits and public sector employment growth. None of these are sustainable growth drivers, with the possible exception of immigration.
Can Canada now rise from these ashes? Stay tuned.