Canada’s struggle to attract foreign investors continues, even though it enjoyed safe-haven status immediately after the financial crisis, which hit the USA particularly hard.
Foreign investors have been keen to buy Canadian bonds since the crisis hit, but their appeal has cooled somewhat, with just C$29 billion in the first five months of this year, significantly less than the C$190 billion of net inflows seen in 2017.
Canada’s overheated property market finally cools down
The country’s property market has also cooled, which along with trade uncertainties, has created a less appealing environment for investors. Rule changes have meant mortgage lending criteria have become stricter, and there have been four rises in the base rate since July 2017.
Yet house prices have stabilised in recent months, and the Teranet-National Bank Composite House Price Index did show that property prices even went up by 0.9% in June this year.
Headwinds for the Canadian economy start to blow
The impact of the economic headwinds on the Canadian dollar have been considerable. The euro was worth C$1.60 back in mid-March this year, but the Canadian dollar has weakened considerably since then.
It hit C$1.49 on August 13, 2018 and although it has since ticked up slightly, it was still as much as C$0.11 lower than it was just five months ago. What happens next to the Canadian dollar will depend on a number of factors, not least the negotiations over the North American Free Trade Agreement (NAFTA) and the further imposition of more US trade tariffs.
Trump and trade tensions
The trade tariffs President Trump has imposed on the US’s trade partners have the potential to create a particularly big impact on Canada, as around 75% of its exports go to its nearest southern neighbour. The tariffs are already on steel and aluminium and there could be more to follow.
One of the biggest concerns to Canada is if the US President imposes the threatened tariffs on the automotive sector, which would have a major impact. The NAFTA revamp does not appear likely to be finalised by the end of this year, according to the National Bank of Canada. That has created downward pressure on the Canadian economy.
Protectionist policies could lead to a worldwide recession
As Trump’s clear protectionist approach to trade becomes more pervasive, there is a risk that continuing in this vein could create a worldwide recession, although the likelihood of this remains low.
That said, and along with the concern obviously surrounding the possible imposition of more tariffs going forwards, growth forecasts for Canada appear to be more encouraging than had been expected. Scotiabank, for example, has increased its growth expectations to 2.2% from 2% for 2018 and while there has been a strong US expansion, the impact on the Canadian economy has been less than had been expected.
Current trade tariffs will not break Canada, but further tariffs could cause difficulties
Given the National Bank of Canada’s calculation that the Canadian industries affected by the US trade tariffs amount to just 6% of national GDP, it is not expected that these tariffs will have a significant impact as they stand.
The possible expansion of these tariffs to other products is where the major concern lies, and any tariffs imposed on the automotive industry would have a particularly bad impact on Ontario.
Investor sentiment less certain
Going forwards however, investor sentiment is less certain than it has been in recent years. Investment intentions have worsened for the second quarter in a row, and the G7 summit where US and Canadian trade relations worsened considerably did not help matters.
There have also been around 50,000 jobs lost since the start of the year, which is the worst figure since the recession in 2009. Household debt is souring too, reaching C$2.2 trillion at the end of Q1 2018.
Interest rate rises could make Canada a more attractive investment proposition
If interest rates are raised as expected in the coming months, that will make the Canadian dollar a better investment for currency plays as the amount of interest available will be higher in both Canadian accounts and also the bonds on offer. So, the relative increase in yield on Canadian bonds could attract greater levels of investment into the country.
In addition, forecasts for the Canadian dollar appear to be more bullish in comparison to sterling and the US dollar. Whether this continues to be the case will remain to be seen, but certainly at present the expectation is that the Canadian dollar with strengthen in the coming months, creating a more attractive prospect for those looking to invest in the country.