The 'sugar rush' effect: Why the U.S. economy is growing faster than Canada's
CBC
In a lot of ways, the U.S. and Canadian economies are similar. They're both seeing progress in the fight to rein in inflation. They both have robust employment levels.
But the American economy is growing by 4.9 per cent, while ours has been flat.
Economists warn the numbers aren't even capturing the full extent of the differences.
"Things are actually worse than the data would suggest," said Royce Mendes, managing director at Desjardins Capital Markets.
He says explosive population growth has inflated economic growth in Canada. Without that, the economy would be decidedly worse than it is right now.
So why are the Canadian and U.S. economies performing so differently?
Two key factors are driving that. One is Canadian, one is American. One is well known, the other caught almost everyone by surprise.
The first is simple: Higher interest rates are having a disproportionately harsher impact in Canada than in the United States.
Canadians have higher debt loads. Those debt loads renew more quickly in Canada. That means higher borrowing costs bite harder, faster here.
Most Americans have a 30-year mortgage, so rising rates don't have as big an impact as they do in Canada, where the average mortgage comes with a five-year term.
Millions of Canadian households are bracing for their renewal in the next couple of years, so they're spending less and saving more. In the United States, households are spending more and saving less.
"The U.S. is unique insofar as Americans are actually spending down their excess savings," Royce said. "Canadians are continuing to sit on that pile of savings because they know what's going to happen when their mortgage comes up for renewal."
As a result, one economy is chugging along, while the other has stagnated. Canada's GDP has been in neutral for seven months.
But the way high interest rates are shaping behaviour doesn't totally explain the disparity between the two economies, says Bank of Montreal chief economist Douglas Porter.
