WHEN the world financial system collapsed in 2007, triggering a global recession, Canada recovered faster than any of the other members of the G7 group of large developed countries. Its banks remained solid, while low interest rates encouraged consumers to borrow and spend. But five years on, consumers are showing signs of flagging. The economy is set to expand by a paltry 1.6% this year. So the authorities are casting around for another source of growth. The trouble is they cannot seem to find one.
Government, both federal and provincial, is trying to curb deficits swollen by stimulus spending. Companies are restrained by uncertainty prompted by Europe’s woes and the stand-off over fiscal policy in the United States, Canada’s main trading partner. Exports have still not returned to their pre-recession peak.

As for consumers, after 11 consecutive years in which household spending has exceeded disposable income, they are deeply in hock. Just over a year ago, Craig Alexander, chief economist at Toronto-Dominion Bank, predicted the debt build-up “is going to end in tears”. The ratio of household debt to disposable income has continued to edge up (see chart 1). An increase in unemployment (from 7% at the moment) or a rise in interest rates could push some households into bankruptcy and puncture a housing bubble inflating in several Canadian cities.
Jim Flaherty, Canada’s finance minister, has repeatedly warned of the threat household debt poses to the economy. He has made it harder for risky borrowers to get mortgages; he publicly upbraided two banks that recently dropped their rate for five-year, fixed mortgages below 3%.
Yet in his budget on March 21st, Mr Flaherty did little to encourage business investment or exports to take the place of consumers in supporting growth. Rather, his focus was on eliminating the federal budget deficit—currently at 1.4% of GDP, low compared with most G7 economies—before the next general election in 2015. His plan, which relies on spending restraint and unusually high revenue growth, is seen by many as wishful thinking.
Mark Carney, the outgoing governor of the Bank of Canada, has also been ringing the alarm on household debt. Yet the bank has kept its benchmark rate at just 1% since September 2010. This month it signalled that the rate is likely to remain there.
House prices are still rising everywhere except Vancouver, but housing sales and housing starts have dropped. Analysts are divided on whether this signals the beginning of a crash, or just a pause before a new burst of activity in the coming months, which are traditionally the housing market’s busiest.
Rather than a housing bubble, what is needed is a rebound in business investment and an increase in exports. Neither is taking shape. Canadian firms have been piling up cash faster even than their counterparts south of the border. Investment is expected to rise by just 1.7% this year. When Mr Carney and Mr Flaherty tried to jawbone businesses into investing some of this money last year—Mr Carney called it dead money—they were met with angry retorts. The budget extended a scheme letting manufacturers write off purchases of machinery and equipment more quickly. But this might not have much impact until the world economy looks more settled.
The disappointing export performance owes more to problems of Canada’s own making. They will take time to fix. The United States took 73% of the country’s exports (and provided 62% of its imports) last year; Canada sells relatively little to faster-growing markets in Asia and Latin America (see chart 2). The government is trying to redress this with several sets of trade talks. But the deal closest to fruition is one with the hardly booming European Union.
Sales of oil and gas, Canada’s biggest single export, are especially tied to the United States. Frantic lobbying by Canadian politicians of the Obama administration in the lead-up to a decision on whether to allow Keystone XL, a cross-border pipeline, is testament to this dependency. Building pipelines to the west coast, to carry exports to Asia, or to the east to supply consumers in Ontario and Quebec (home to 62% of Canada’s 35m people) will take years, even if planning battles are won. Meanwhile, Canadian energy exporters face falling prices because of the boom in shale gas and oil in the American Midwest.
So the Canadian consumer remains the main hope for the economy. It is an odd situation where both government and business have decided to be excessively prudent in their spending, but are hoping that consumers will not follow suit just yet.