A chilling nation

Looks like the writing’s on the wall. It says, Help!

Consider this: during Covid almost 900,000 Canadian businesses were handed $49.2 billion in loans of up to $60,000. What a sweetheart deal. No interest. No payments. And if they partially repaid the debt by early 2024, then got to keep a third of it – $20,000. Free money. All they had to do was take the cash, sit on it for a while, repay a hunk and pocket the rest.

Alas, the original deadline was extended because hundreds of thousands couldn’t pay. Now we learn over 200,000 borrowers took out fresh commercial loans to repay Ottawa so they could keep the twenty grand. The loan money went poof. Business was marginal.

Conclusions: when the government gives people money it never ends well. Second, Canadian small business is sick.

And did you see the comment posted this week from blog dog Tom, in Mississauga? Chilling.

Our company’s blind and shutter dealer in Woodstock went from record sales in Q123 to worst sales in Q124 year since opening in 1995.

The factory beside our place in Oakville closed production 2 weeks ago.

My company is abandoning our office space on North Service Road in Oakville at the end of next month and did 2 more permanent layoffs last week.

The goalie on my Tuesday hockey team, apparel wholesale, had his worst Jan and Feb in 26 years.

I’m going with the anecdotal evidence, that Ontario is already in recession, that there were more than 100,000 private sector jobs lost in March.

Hmmm. Not good. But consistent with a lot of things we know about our nation at the moment.

We are the most indebted country in the G7 when it comes to households. More than $200 billion in mortgage loans are coming up for renewal in the next few months, causing further distress. Our economy is barely growing – expanding at a meagre 1%, just a third of the growth Americans are experiencing. Every sector of society is depressed and cash-strapped. Unemployment ticks relentlessly higher. The Ontario government yesterday announced a fat new deficit. The feds are running more red ink in the current fiscal year as businesses hurt and corporate taxes tank. Festivals and long-running events, like Just for Laughs, are going bankrupt amid unrepayable debts. Transit systems are hurting. The Toronto school board is $20 million a year in the hole. That city has a deficit of $1.5 billion. The Canadian banks have set aside huge whacks of money to cover potential bad loans. On and on it goes.

So the evidence abounds. The economy is cooling faster than Trudeau poll numbers. Higher interest rates have, as it turns out, been crushing. Consumer spending has dropped, and the cost of living along with it. Our latest CPI was 2.8%. The month before was 2.9%. So inflation here is coming off, along with the GDP, just as both in America heat up.

Clearly Canada is more sensitive to higher rates than the US because we’ve done a fine job of pickling ourselves in debt. Look at the latest OSFI ruling (last Friday) which seeks to corral loans to people with debts exceeding 450% of their incomes. And there are a helluva lot of them.

What does this mean?

In a word, the CB won. Ten interest rate increases taking the Bank of Canada policy marker from one quarter of one per cent all the way to five – a 1,900% jump – were the meds needed to turn 8% inflation into something with a 2-handle. It also sank economic growth and is now sucking off private and public money in alarming debt service payments. Almost $40 billion in tax money is being burned in servicing the federal debt alone. And we’re still increasing it. Meanwhile the greatest portion of the CPI is now shelter costs – mostly mortgage interest – which Tiff Macklem directly controls.

Low growth. Falling inflation. Rising interest charges. Job losses. Small businesses unable to pay gentle loans. Plant closures. Housing starts on the decline. Rising mortgage delinquencies. Growing bank loan loss provisions.

If this continues economists know what the next step will be. The R-word. Canada risks slipping into recession while the US – despite its political clown show and global entanglements – has robust growth, full employment and record markets.

This makes interest rate cuts in 2024 inevitable. It also builds the case that we move before the Fed does. Delay could bring misery to many.

“We have long been of the view that the BoC will move ahead of the Fed,” says BMO’s chief economist Doug Porter. And so the odds of a cut on April 10th have gone from about zero to 20%. The chances of a drop at the setting after that (June 5th) are now 70%.

Will our guys do the right thing and save our indebted tails?

You should hope so.

About the picture: “Thanks from Victoria,” writes Rob. “I’ve enjoyed your insight since I first discovered your newspaper column 20+ years ago.  I”m sending you a clipping that was lost in my files, kept to remind me why I did what I did. Also, why math becomes more instructive when more variables and opportunity costs are included. This is our Beast, Urso.  I get this attitude from him when he figures I’ve stared too long at the talking glowing rectangles, and should switch to play.  My wife likes him more than me, but I suspect its because he doesn’t talk as much.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.