Mar 17th, 2021
Today’s episode is a brief overview of the state of the economy in Canada. As an Accredited Canadian it’s important to understand Canada’s place in the world so you know how best to invest your money.
Explaining in exacting detail how the economy works is beyond the scope of this podcast, but I’d recommend watching Ray Dhalio’s “how the economic machine works” by Ray Dhalio, an American billionaire for a 30 minute comprehensive summary on the topic to whet your appetite for further research.
Suffice to say, investing your money in companies and assets in a growing economy is how to turn your earned income into investment income. One of the most common measures of growth in an Economy is called Gross Domestic Product. The definition of GDP Investopedia is:`
GDP growth leads to job growth, which leads to in-migration to fill those jobs. This means population growth. Population Growth leads to more demand for goods and services in that area. Investing your money in places with GDP growth will see your investments grow in the future. For instance, and in my industry of real estate investments, a growth or shrinking of GDP is a leading indicator of the price of rent and price of houses, with an 18-24 month lead time in either direction.
What I just described is a bit of an over simplification. In light of the recent trend to work from home, which many people adopted in earnest during the pandemic, many jobs that used to cause in-migration can now be done remotely. However in Canada we are rich in natural resources, and so we have low productivity compared to other countries. This means we need more people physically present to get the job done. 30% of Canadian exports are unfinished goods like crude oil, coal, wheat and metals, many jobs require people to be physically present run mining equipment, running sawmills, driving trucks and running farming equipment. These kinds of jobs can’t be done remotely, you need people to live near the natural resources. Every one of these primary sector job supports about 10 secondary sector jobs that produce finished goods, people doing work like manufacturing cars or car parts, or making flour, or cutting potatoes, or butchering animals. And the primary and secondary sector jobs support the tertiary sector jobs, also called the service industry. You might need 100 people in the service industry including cooks, wait staff, grocers, mechanics, car salesmen, teachers, police officers, doctors and dentists and all the people you need to make a society function well, you may need 100 jobs to service each person working in the primary or secondary industry job. Also remember that since each person with a job may have a family with a few people in it, one primary sector job could be supporting as many as 1000 people who may not be in the workforce. That is a lot of demand and consumption for things people enjoy, like food, housing, transportation, education and entertainment. So you see how small changes in GDP can have a large impact in the population of an area, and the demand for goods and services in that area. This is why GDP is so important to pay attention to.
If you’ve been casually following headlines for your investment news, you may be wondering why so many Canadian market commentators are focused on the United States, and why they use so much U.S. data. The reason is because Canada’s largest trade partner by a wide margin is the United States, so like it or not, we are heavily influenced by our southern neighbour. The United States have the largest economy in the world, and as the world’s only superpower, the policies and economic welfare of the U.S. directly impacts Canadians, including Accredited Investors.
On the next episode of the A.C.T. podcast, we’ll be discussing Macro Economics in more details, and explore the future of world markets and how Canadians like you and me can position ourselves to prosper from the coming trends.