Canadian newspaper articles abound with reports of the economy on a tear, especially given the results of the first half of the year when the economy expanded by 4%. Furthermore, the Bank of Canada endorsed this growth performance by its raising the bank rate by a total ½ %.  Adding to this enthusiasm is the rise in the value of the loonie by  8 % from its recent low. The international community of investors likes the Canadian story and have responded quickly to the change in direction by the Bank of Canada. Now, expectations are rife that further rate increases will be forthcoming.

How sustainable is this growth spurt? To begin with, the recessionary conditions of 2015-16 make the rebound of 2017 look extraordinary. Comparing the results of 2017 with the underperformance of the previous two years is easy and can give a misleading impression of strength. Governor Stephen Poloz said that the rate cuts of 2015  had ‘ done their job’ and it was the right time to reverse course. But had these cuts really done their job?

Export growth was rather mediocre in the first half of 2017, but more importantly exports have decline dramatically in June and July, approximately by 10%. Given that automotive exports figure prominently, the build up in the industry’s inventory and the current strike at GM will negatively impact future exports.

The other important component of GDP is business investment which has only made a modest recovery from the severe downturn initiated by the collapse in oil prices in  2015. The gains in fixed investment in 2017 are just a return to average historical levels of investment and are well below the levels of the boom years when oil prices were at all time highs.

The Federal government released its deficit figures for the fiscal year 2016/17 ( ending in March). While the deficit hawks will gain some solace that deficit came in at C$17b, well below the projected C$23b, the lower results will mean there is less stimulus than initially expected. This will also be reflected in a lower growth path for the balance of the year.

Finally, there remains the wild card regarding the Canadian housing market and, in particular, the Toronto and Vancouver markets.  Both cities witnessed some unwinding from the dizzy heights of 2016. Should there be further price reductions, we can expect that this will adversely affect consumption as individuals reassess their spending patterns and debt loads.

 There are good reasons to question whether the recent experience can be sustained well into 2018.