Canada Avoiding The Financial Crisis Is A Myth Highlighted By Australia Comparison

Despite being upside down, Australia shares a lot of similarities with Canada (besides Monarchs). A new analysis from BMO looks at those similarities, especially around population and inflation, highlighting the fact Canada’s economic drag is much more complicated than just population growth. The bank only walks us to the point of divergence, the Global Financial Crisis, but doesn’t take us any further. However, it’s clear that Canada getting away from the Crisis with minimal consequences is just a myth. Rather than a devastating blow to investors, Canada distributed the blow to the economy over a span of 15 to 20 years. A victimless crime… like punching someone in the dark.

Canada & Australia Had Similar Economies But Performed Differently

Canada and Australia are often compared due to the many similarities they share. They’re both similar sized economies, with similar levels of development, and social programs. They also both maintained aggressive population growth strategies, and shared similar monetary policy performance. Comparing the two countries thus provides solid insight into how the two regions are evolving. 

“Both Canada and Australia have national elections coming up in the next few weeks,” explains Douglas Porter, Chief Economist at BMO Capital Markets.  

Adding, “Both have roughly similar inflation rates and similar GDP growth rates for 2024. But the comparisons may end there when looking at their relative economic performance over the past few decades.”  

Canada & Australia Both Saw Similar Population Booms

Many of Canada’s economic woes are attributed to the country’s population growth. Negative GDP per capita is often dismissed with the argument that the country’s population is growing much faster than other G7 countries—it simply can’t be compared. However, the smaller population of Australia outpaced Canada to 2015, then roughly maintained the same ratio going forward. 

“As the chart [below] suggests, the relative size of the two nations in population terms has been broadly stable, with smaller Australia growing a bit faster. The latest readings have Canada’s population at 41.5 million vs just over 27 million in Australia, or a ratio of about 1.5:1,” explains Porter. 

The fast population has produced housing heavy economies in both regions. This is always an issue since housing is considered a non-productive investment, dragging GDP growth. However, the drag in Canada has been much worse.  

Australian GDP Grew Nearly 60% Faster Than Canada Since 1980

Porter urges investors to look at nominal GDP over the period. After converting Australia’s currency to Canadian dollars, the issue becomes apparent. At least to investors.

“In the late 1980s, Canada’s GDP was almost double the size of Australia’s. In the past 10 years, that ratio has tumbled to around 1.25,” explains Porter. 

Source: Haver Analytics; BMO Capital Markets. 

Adding, “But something really significant shifted from about 15-20 years ago (around the financial crisis), which transformed Australia from having a much lower GDP per person to now much higher than Canada, when expressed in a similar currency.”  

GDP per person is a country’s output relative to its population. It’s a strong indicator of real income growth, and quality of life due to household economic disparity. Canada has increasingly placed its per capita growth on a backburner, instead opting for credit-driven, non-productive growth. The country’s population is losing the quality of life advantage they once had. 

Porter leaves us hanging with the analysis, but it appears he’s poking at the myth of Canada during the Financial Crisis. Most believe the country avoided negative impacts, but that’s not true. Canada was just more opaque about its bank bailout. At the time, Deputy Governor Tiff Macklem even warned of an investor-driven real estate bubble detached from reality, potentially creating a drag on the economy. I wonder what he’s doing now?

The drag Canada is seeing is far from normal and not entirely driven by its population growth. However, it is driven by steering the whole economy towards accommodating population growth and drumming up demand for infrastructure. Rather than a blunt impact to investors like the US saw, we traded it for a dull and persistent blow to our economic future. Not a winning proposition, but certainly one that will have a longer and more destructive impact if not addressed.