Canada emerged from the financial crisis with hardly a scratch, but it is going to find the global economic recovery a lot more difficult.
The stock market has been suggesting this for the past two years. The S&P/TSX composite index has fallen more than 13 per cent since April, 2011, while benchmark indexes in the United States and Japan have enjoyed double-digit increases and even German and U.K. indexes have shown slight gains.
Now, Standard & Poor's is adding to the gloom with a report arguing that Canada's economy will struggle not only with weak commodity prices but also with restrained consumer spending.
"After being a growth leader among advanced economies in 2010 and 2011, Standard & Poor's Ratings Services now sees the country taking a back seat in the global recovery," said Robert Palombi, a fixed-income analyst at Standard & Poor's, in a report.
Lagging could be a hard adjustment for Canadians to make. Between 2007 and 2011, Canada's gross domestic product outperformed U.S. GDP, either through bigger growth or smaller declines. That marked the longest stretch of outperformance in at least 30 years, according to S&P.
A noticeable part of the problem now is that commodities are no longer providing much support to either the Canadian economy or the stock market, where they represent about half of the benchmark index in terms of their weighting.
Crude oil has a tough time rising above $90 (U.S.) a barrel, gold is in its first bear market in 12 years and even base metals are struggling – and S&P believes that U.S. and Chinese growth won't be strong enough to lift the global economy and drive commodity prices higher.
This puts limits on Canadian exporters and could restrain investment spending and hiring in the resources sector.
But S&P believes that a potentially bigger drag comes from the domestic economy, where Canada faces declining home prices, rising unemployment, and a combination of easing debt levels and constrained spending – trends that have barely been felt so far.
The greater balance between housing supply and demand should drive home prices down by 5 per cent this year. That's the good news.
The bad news is that S&P sees a 10- to 15-per-cent chance of a darker future, where the global economic recovery falters. In that case, Canada's unemployment rate shoots up to 9 per cent and home prices decline as much as 20 per cent.
Either way, Canadian debt levels also look like an obstacle. Debt as a percentage of disposable income has risen to a point where it is considerably larger than U.S. levels.
But it is now showing signs of stalling, with consumer credit card debt expanding at its slowest pace in 20 years and growth in residential mortgage credit at 12-year lows.
"Household earnings are no longer increasing, something that might create stronger incentives for consumers to reduce spending and manage down their debt burdens," Mr. Palombi said.
S&P expects the Canadian economy to expand just 1.7 per cent in 2013, lagging U.S. growth of 2.7 per cent.
That's not a disaster, but it could be enough to push investors elsewhere, reversing what had been a strong Canadian draw.
The Canadian dollar has also begun to look vulnerable. The loonie has slumped about 8 per cent next to the U.S. dollar since April, 2011.
Among stock market sectors, Canadian energy and materials stocks are already mired in bear markets.
But even financials, the talk of the world for their relative stability during the financial crisis, have stalled. Industrials and consumer discretionary stocks began to weaken nearly two months ago.
Canadian investors have had little reason to diversify abroad in recent years when the home country was seen as a haven. That will change if Canada becomes a laggard.