Why Canada will underperform in 2013

Canada’s economy will be weak this year.

But 2012 went well, especially compared to other G7 countries, says Pablo Martinez, assistant vice president of global fixed income at CIBC Asset Management.

We had real GDP growth of 2.1% and created 310,000 jobs in 2012, beating analyst expectations.

But one-third of these new jobs were in only two sectors, says Martinez: construction and government. He adds, “It’s hard to imagine a scenario where the same performance will be repeated this year.”

Read: Look to the long term in 2013

There are signs of weakness in the real estate sector in Canada. Prices are falling slightly and year-over-year sales are down significantly.

And both federal and provincial officials are cost cutting. This means jobs will be scarce.

Read: Budget 2013 focuses on deficit taming

“Canada had a monthly average growth in employment of about 26,000 jobs last year, and this will edge down to 10,000-to-12,000 a month,” adds Martinez. This is much lower than investors and economists have seen over the last few years.

Read: Canada’s job market rebounds, for more on 2012’s data

Consumers have also been our primary economic driver. They account for about 70% of Canada’s GDP, he says.

Depending on consumer activity comes at a cost, however, since the country is now battling a high debt ratio. This growth isn’t sustainable, so Martinez predicts consumers will spend less.

Read: Consumer confidence mixed

“This will have a negative impact on inflation, so we’re forecasting GDP growth of 1.8%,” he adds. “[But] inflation is still below the Bank of Canada’s target of 2%.”

Read: Investors shouldn’t worry about inflation

Further, “House prices are edging down around the country,” and he suggests some markets may currently be in a bubble.

“The problem with housing is it’s not a sector that slowly accelerates or degrades,” says Martinez. “It either booms or busts, and the Canadian housing sector is overpriced.”

He adds these inflated prices will remain stable or fall slightly despite the lack of strong growth in 2013. This is because the unemployment rate still remains low in Canada, so people can still afford their mortgages.

Interest rates are also expected to remain low.

Read: Global housing still weak: Scotiabank

“Canadian homeowners aren’t seeing the same situation we saw in the U.S. in 2007 and 2008,” says Martinez. “Our market is fairly stable, but there has been a significant shootout in prices and this will correct over time.”

Read:

BMO raises mortgage rates

No housing bubble, says Scotia

Rise above low interest rates