The above chart summarises the underlying problem facing policymakers in Canada: construction jobs have become too large a portion of the economy.
There has been a lot of discussion of the Canadian housing bubble. However, house prices are not really the problem; the vulnerability of the economy is via the labour market. Too many housing units are being constructed, and construction workers will be shed as this winds down. The job market in Canada, as is the case in the United States, has become structurally sclerotic. The annual growth rate of the total number of jobs (in all sectors) has not been able to break above 2%, despite the seriousness of the downturn in 2009. As such, it is unclear whether the job market can absorb a serious outflow out of the construction trades (as well as other sectors that have ridden the housing bubble, like Retail).
Although the Canadian economy is stereotypically related to the extraction industries (fishing, forestry, mining, oil and gas), the employment in these sectors is very small relative to Construction or Retail. Commodities are very important for the Canadian dollar and stock market, but they have too small a footprint on the domestic labour market to overcome the potential job losses as the construction market cools. Domestic interest rates will be following these labour market trends.
I will be covering this subject in more detail in upcoming posts. (Why the economy has not yet blown up.)
(c) Brian Romanchuk 2013