Canadian Macroeconomic Instability in the Time of COVID-19

While relative financial and industrial stability characterized Canada through the global financial crisis of 2007 and the Great Recession of 2008-09, Canadian capitalism has become increasingly unstable over the last decade and a half. Degrading corporate profitability undermined capital accumulation, especially in machinery and equipment, while historically low interest rates alongside waning profitability in the banking sector encouraged financial intermediaries to expand lending to households, particularly in the form of mortgages. The rapid expansion of credit to households and a significant corporate landgrab inflated new housing prices and improved profitability in the construction sector. In response, business investment in construction accelerated. This contributed to a housing boom in which real estate became the leading contributor to GDP. This process, however, was premised upon growing household debt that appears to have reached its limit. Poor business profitability alongside the household debt-driven housing bubble pose a significant risk to Canada’s highly-leveraged financial sector.

Here, I deploy a classical Marxian theoretical framework motivated by the work of Grossman (1929), Mattick (1971), Shaikh (2016), and Roberts (2016). This tradition underscores the importance of business profitability and how its deterioration leads to stagnation. In the first part of this article, I examine the relationship between profitability and low economic growth in Canada. I survey the evidence for growing instability and argue that degrading profitability since 2005 underlies it. In the second part, I assess the state of Canada’s provincial centers of capital accumulation, Alberta and Ontario.  In the third part, I explore the housing bubble and link it explicitly to Canada’s profitability problems. In the fourth part, I discuss Canadian bank leverage and argue that the conditions that permitted the banks to withstand the worst of the global financial crisis of 2007-08 and the Great Recession of 2008-09 have eroded. I argue that their largest assets, i.e. loans to households, have grown increasingly unreliable. In the fifth part, I examine recent trends in household finances and connect them to these dynamics. Household debt appears to have reached its limit in the context of poor business profitability and lackluster capital accumulation. The shock of the COVID-19 crisis has made matters worse and destabilized Canadian capitalism further.

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