Canada's Economy Is Entering A World Of Hurt [CHARTS]

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Economists have been talking about if and when the Canadian housing bubble will burst.

At the same time, we now appear to be well beyond the bottom of the U.S. housing recovery.

In a new report, British Columbia-based Pacifica Partners Capital Management asserts that question is missing some much scarier stuff going on up north.

Yes, housing is now in decline after largely avoiding the 2008 shock, they say. But everything else has also been going haywire: unemployment, credit, stocks, etc. 

That is all the more remarkable, they argue, because Canada emerged from the 2008 crisis appearing a paragon of stability.

Meanwhile, in those same categories, the U.S. has recovered significantly. 

Pacifica quotes Horace to sum up the situation: “Many shall be restored that are now fallen and many shall fall that are now in honour.”

“A pronounced shift in both Canadian and US economies has taken place,” write Pacifica’s analysts. “The Canadian economy, once the envy of Americans, Europeans, and others, is now widely viewed as a commodity dependent, “one trick pony”. 

In a series of charts we’ve reproduced here, Pacifica shows how a “mean reversion” is taking place in North America, with the U.S. economy recovering while Canada’s is for a world of hurt.

Home prices in all major Canadian markets are way off all-time highs.

Vancouver, Toronto, and Montreal are barely into the first year of 'a potential lengthy period of price weakness.'

Source: Pacifica Partners

And average condo prices are close to 2007 levels.

Source: Pacifica Partners

Canadian home starts are now declining at the fastest rate since the financial crisis.

This is the indicator that gives Pacifica most pause. They write: 'With 20% of Canadian GDP directly involved in construction and real estate activities, a continued slowdown in housing-starts will have a marked impact on the consumer behaviour and ripple through other consumer sensitive areas of the economy, including retail sales, financial services, transportation, and warehousing.'

Source: Pacifica Partners

Canadian leading economic indicators are now falling behind American ones by the widest margin in over two decades.

The strength of the US and weakness of Canada is not confined to real estate markets.

Source: Pacifica Partners

And all major components of home ownership costs have grown at least as must as Canadian core inflation.

This includes replacement costs, property taxes, insurance, maintenance, furnishings, and miscellaneous expenses. In some cases it's more than twice as much as CPI.

Source: Pacifica Partners

U.S. and Canadian stock markets are diverging.

The S&P TSX composite, Canada's main index, has lagged the S&P 500 for the better part of two years. 'This ominous pattern could foreseeably continue should drivers of the Canadian stock market, notably global commodity demand, continue to weaken,' Pacifica writes.

Source: Pacifica Partners

Pacifica notes consumer confidence is now approaching levels last seen immediately following the financial crisis.

Source: Pacifica Partners

Meanwhile, Canadian companies shed 105,400 jobs in March and April 2013. Unemployment in Toronto is hovering around 8%.

'The weakness in the Canadian job market may come as a surprise to some readers as news headlines often indicate a reduction in the unemployment rate,' Pacifica says

Source: Pacifica Partners

Montreal unemployment is about the same.

While the unemployment rate has been on a downward trend since the end of the recession, however, it's gotten stuck at 7%. This is in comparison to the sub 6% unemployment rates seen in Canada before the recession.

Source: Pacifica Partners

All major markets are signaling upticks in misery, despite 'barely-existent inflation.'

Source: Pacifica Partners

Finally, debt to GDP is now enormous.

Canadian debt levels relative to GDP appeared to have now stalled near the 90% levels. The amount of Canadian debt now equals the market cap of the entire Deutsche Borse.

Source: Pacifica Partners

Needless to say, it's time to get bearish.

Real estate appears overvalued by approximately 30% in most major markets. 'Canadian economic weakness,' Pacifica says, 'the expected contraction of outstanding consumer credit, and already heightened real estate prices serve as the basis for our bearish stance.'

Source: Pacifica Partners

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