The Global Slump

Profit growth in Canada was robust until 2008, and Canada was the first G7 country to emerge from the Great Recession, both in terms of GDP growth and employment. Expanding profits and relatively vigorous capital accumulation going into the crisis shielded its industrial and financial system from the most pernicious effects of the global downturn.

But Canada didn’t escape the crisis unscathed. Like many countries around the globe, macroeconomic conditions in Canada have deteriorated over the past several years. In particular, the rate of profit has fallen and capital accumulation has slowed. In 2005, the rate of profit stood at 21 percent, while the rate of accumulation until 2008 undulated between 7 and 8 percent. Post-crisis profitability has yet to recover — since 2012, the rate of profit has hovered around 15 percent, while the rate of accumulation has fluctuated listlessly between just 4 and 6 percent.

The profit level is expected to fall further this year in light of the latest contraction of corporate earnings, negatively impacting business investment and capital accumulation. As one economist recently put it, “profits call the tune” in capitalism — and with moneymaking opportunities drying up, investment is shrinking accordingly. The build-up of “dead money” in corporate coffers now exceeds $700 billion, a mountain of cash that dwarfs Trudeau’s proposed $125 billion infrastructure spending plan, one of the pillars of the Liberals’ election platform.

In recent years, the investment slowdown has negatively impacted employment. Canada’s capital stock — machinery, equipment, buildings, and structures — has not expanded quickly enough to offset the growth of the potential workforce, and the employment rate (the ratio of those employed to those of working age) in most provinces has been stagnant since the Great Recession. In Alberta, for example, the employment rate fell from 71 percent in 2007 to 68 percent in 2010, where it has remained since.

Unsurprisingly, weak business profitability, investment, and employment growth have been matched by lackluster economic growth. In the ten years leading up to the global financial crisis, Canada’s average annual GDP growth was 3.2 percent. Since the Great Recession, that number is 2.5 percent.

Poor profitability, increasing corporate cash hoards, stagnant employment, and sluggish growth are the real story behind the Canadian economy. And a closer look at Canada’s key growth sectors — petrochemical, manufacturing, and real estate — reveals that the economy is increasingly vulnerable to shocks.

A Precarious Economy

The sectors that experienced the largest declines in GDP through the recession were mining, quarrying, and oil and gas extraction, particularly in provinces like Alberta, which will see an economic contraction of 0.6 percent this year. Dave Roberts, CEO of Penn West, epitomized the actions of Albertan business leaders recently when he “made a number of exceptionally difficult decisions” that included laying off 35 percent his company’s workforce.

The decline of Alberta’s petrochemical industry is rooted in broader global shifts. Approximately 99 percent of Canadian crude is destined for the United States, but US demand has dropped with the spread of fracking and horizontal drilling techniques. Since the end of 2014, the number of barrels exported daily to the US has plummeted by nearly 100,000. To make matters worse, demand for Canadian crude fell in other markets around the globe as well. Since the beginning of 2014, crude shipments to global markets shrank by a colossal 72 percent as a result of the slowing world economy and weakening demand in China.

The leading lights in Alberta’s provincial government have identified “a prolonged period of low prices stemming from an oversupplied market” as “the main risk” to the economy in the coming period, and falling profits in Alberta have negatively impacted the country as a whole. Profits in Canada shrank by 3 percent in the fourth quarter of 2014 and by 11 percent in the first quarter of 2015 — the largest quarterly decline since the Great Recession.

The petrochemical contraction has been offset by growing exports from other provinces (especially Ontario), boosted by the declining value of the Canadian dollar. In the middle of 2014, CAD $100 could purchase USD $94. Today, it can only buy USD $76.

The descent of the loonie relative to the greenback exemplifies broader global trends. Financial instability around the world has encouraged investors to turn to safe-haven currencies like the US dollar and the Swiss franc. Meanwhile, slumping energy exports, plummeting profitability in the petrochemical industry, and the Bank of Canada’s low-interest-rate strategy have pushed down demand for the loonie.

The stronger greenback and the rebounding US economy have, however, been a boon for export-reliant Ontario. Since January, while the economy as a whole was slipping into recession, exports grew considerably and Canada’s trade deficit decreased. (The largest increases in exports through the recession were in consumer goods — like pharmaceuticals and cleaning products — and farm, fishing, and intermediate food products.)

These developments have boosted corporate earnings — manufacturing profits grew by 96 percent in the second quarter of this year — but export-led growth is still volatile and its fortunes are heavily dependent on the health of the energy industry. And while recent declines were offset by a significant jump in passenger car and light truck exports, it wasn’t enough to avoid a resurgent trade deficit.

When the global financial crisis erupted, the Bank of Canada quickly and substantially lowered its overnight interest rate. It doubled down on that policy in mid-July of this year, reducing it to 0.5 percent in anticipation of recessionary news. Near-zero interest rates throughout the global slump have encouraged borrowing and investment, particularly in the residential housing market.

The central bank’s rate cuts in July, coupled with poor profitability in the oil fields, have further driven up prices in real estate, as capital seeks higher returns. Between the first and second quarters of 2015, the average price per housing unit rose by almost 18 percent in Ontario — the largest quarter-over-quarter increase since the 1989 real-estate bubble. In August alone, the average sale price of homes in Toronto went up by ten percent, reaching a whopping $602,607. Over the same period, investment in new housing construction jumped by 19 percent in Ontario and by 15 percent in Canada as a whole.

The takeaway is that, like the US after the tech bubble, Ontario’s real-estate industry has helped stabilize growth in Canada over the recessionary period. Still, both mainstream and radical thinkers have pointed to the province’s red-hot housing market as a looming threat. Until recently, underlying conditions of growing profits and strong capital accumulation have dampened these warnings. But as profits have suffered, capital accumulation has slowed, employment growth has stagnated, and the financial stability of firms and households has eroded, the precariousness of rising housing prices is becoming ever more obvious.

Despite an uptick in profitability in the second quarter of this year, corporate profits have been shrinking overall in the real-estate sector for the last three years, and are now 39 percent lower than they were in the fourth quarter of 2012. This precipitous decline should be juxtaposed to another troubling trend — a rising mortgage debt service ratio (which measures mortgage debt payments relative to income). In the first half of this year, the ratio reached a two-decade high, reflecting the shakiness of debt servicing.

The Parties’ Responses

Canada’s recent economic woes and its precarious growth trajectory are tied to the global slowdown and growing contradictions within global capitalism. But on these connections, Canada’s mainstream parties have been silent throughout the campaign.

The Conservatives have promised to stay on course, confident that energy prices will rise and that pipeline expansions will facilitate exports to global markets. The Liberal Party, for its part, has adopted a pragmatic approach to the energy sector. Trudeau says he will discuss energy issues with provinces on a case-by-case basis after the election. The NDP has promised stricter environmental regulations — but has not challenged the accumulation strategies that make Canada’s economic trajectory increasingly parlous.

Each party is proposing to spark growth by fiddling with taxing and spending. The Conservatives are offering more favorable tax rates and employment insurance premiums for wage earners alongside lower tax rates for small businesses. The Liberals are pushing for a higher rate on top income earners to pay for middle-class tax cuts. They’re also promising to reduce employment insurance premiums and expand benefits.

The NDP has been equally uninspiring. Mulcair says his party will slash taxes for small businesses and increase them for corporations — but that the corporate tax rate will remain “far below the average that the Conservatives had for the ten years that they’ve been in power.”

All three parties also support infrastructure spending, differing only in their willingness to deficit spend to cover the cost. While the Conservatives say they will post surpluses and the NDP vows they will balance the budget, the Liberal Party intends to run a deficit for three years to help pay for a significant boost to infrastructure spending.

Despite stagnation, from the standpoint of capital, the Conservative Party has competently managed economic affairs. The NDP and Liberal Party, for all their criticisms, have offered few compelling alternatives. Since all three major parties are devoted to capitalism, it is unsurprising that the policies they propose remain technocratic and tepid.

Even the NDP isn’t willing to confront the fact that Canada’s economic fragility is fundamentally linked to the way the country is integrated into the global capitalist order. Years of lackluster capital accumulation, coupled with stagnant employment rates and sputtering output growth, are taking their toll on the Canadian working class.

All the Canadian center-left parties offer are more substance-free accusations of economic mismanagement, while the wheels of capital accumulation churn relentlessly towards crisis — grinding up working people in body and spirit along the way.