The Canadian economy is recovering much faster than expected… just not in a healthy way. Canadian real gross domestic product (GDP) is down less than two points in Q4 2020. Digging into the numbers, we see the headline is better due to households doubling down on real estate mania. When housing is stripped from GDP, the drop becomes twice as large. Housing investment is managing to pick up spending from other parts of the economy.
Canadian GDP Is Now Only 1.5% Lower Than A Year Before
Canadian GDP has only made a minimal decline compared to last year in real terms. The last quarter came in at $2.1 trillion at Q4 2020, up 3.4% from the previous quarter. GDP is now 1.5% lower than the same time last year. Virtually everyone considers this a better than expected recovery. There’s a small catch — housing is consuming even more of the country’s investment.
Canadian GDP Fell Twice As Much If You Exclude Housing
Excluding residential investment, the amount invested directly into housing, GPD is much worse. GDP excluding housing made a quarterly increase of only 3.1% in Q4 2020. The most recent quarter would also be 3.4% lower compared to the year before. Residential investment didn’t just pump the numbers higher on a quarterly basis. It also cut the annual decline in GDP down by half.
Canadian Real GDP ChangeThe annual percent chage of real gross domestic product (GDP) including and excluding residential investment. Source: StatCan; Better Dwelling.
What’s the purpose of excluding residential investment from the numbers? To show how massively the past year of real estate activity has skewed the numbers. GDP recovering in aggregate shows a recovery. GDP ex-housing shows more economic activity is being diverted to residential investment. Since residential investment is typically slow to move, this isn’t economic activity that can just pivot. Other segments are going to have a tough time recapturing that lost ground.
The Canadian Economy Is Losing More Points To Housing
Canada is taking a dive deeper into the housing rabbit hole. The amount in residential investment is a record 9.3% of GDP in Q4 2020, up from 7.5% a year before. The ratio was already a higher allocation of capital than the U.S. saw during their housing bubble in 2006. Now add two more points in just a year, and this is an epic misallocation of economic resources.
Canadian Residential Investment Contribution To GDPCanadian residential investment as a percent of gross domestic product (GDP). Source: StatCan; Better Dwelling.
The Canadian economy appears to be recovering quickly, but it looks nothing like it did before the pandemic. This gives more context as to why the Bank of Canada said they “need” the growth. It’s to make the economy look like it’s in a much better place than it really is.
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