CONNECT THE DOTS*

A SLOWDOWN IN CHINA’ S GROWTH FROM THE LOW DOUBLE DIGITS TO 7% OR LESS MAY NOT SEEM LIKE A BIG DEAL, BUT THE KNOCK-ON EFFECTS, COMBINED WITH OTHER MACRO-ECONOMIC NEWS, WILL EVENTUALLY WORK THEIR WAY THROUGH THE REST OF THE GLOBAL ECONOMY, INCLUDING CANADA

CHINA

The Chinese stock-market routs in 2015 and early 2016 grab headlines, but are of little consequence for Canadian investors. Yet, the country’ s economic slowdown sure is. Lower growth levels and a transition to a consumer-led economy as opposed to an investment-drive none mean lower demand for oil and other natural resources, pushing down prices for those commodities, many of which Canadian companies sell.

OIL

The resulting lower demand for oil, combined with a supply glut, has pushed the price of down to around US $30 from more than US $100 in mid -2014. Canadian and U.S. companies have slashed their capital expenditure budgets as a result, but the Organization for Petroleum Exporting Countries continues to flood the market with cheap oil, hurting both their economies and others.

THE FED

Behind the strong U.S. dollar economy is a relatively strong economy, one that the U.S. Federal Reserve believes is well enough to with stand interest rate hikes. The central bank may have taken its time in raising its benchmark rate 25 basis points to 0.5% in December, but it also signal led that it may raise rates four more times this year. If it does, that should further entice investors who are getting very little from fixed income anywhere else.

U.S. DOLLAR

Historically, there has been an inverse relationship between the price of oil and the U.S. dollar. Some economists believe that relationship broke down with the rise of U.S. sh ale, but it seems to beholding true today. Of course, it helps that the U.S. economy is one of the few that seem to be firing on at least a few cylinders, increasing investors’ belief that it is a relative safe haven and drawing foreign money away from countries such as Canada.

CANADA’S ECONOMY

The lack of demand for energy and other resources is a big reason why the Canadian dollar is slumping, since there’ s less demand to buy the loonie to purchase such commodities. So far, Alberta has borne the brunt of oil’ s decline, but economists and analysts expect there will be some knockon effects on there st of the economy as the slump works it way through the system. That will eventually affect the major banks, even though they have little direct exposure to the energy sector.

HOUSING

Alberta’ s real estate market is already slumping. The Canadian Real Estate Association expects average house prices in Alberta, Saskatchewan and Newfoundland and Labrador to fall this year because of oil’ s down turn, with the price for the average Alberta home dropping by 2.5%. Low interest rates should, while federal mortgage reforms may hurt. But it could get ugly if banks keep hiking their mortgage rates in the face of perceived credit risk, or if financial pressures cause a pull back in lending.