Decent Canadian recovery outshines sluggish U.S.
First ice hockey, now the economy. The annualized second-quarter growth rate of 2 percent in Canada didn’t much beat the 1.6 percent pace in America, but final demand growth at 3.2 percent was much stronger than the U.S. equivalent expansion of 1 percent. That’s an indication that Canada’s economy, though weighed down partly by its neighbor’s weakness, is recovering more robustly.
While Canada’s economy is closely linked to that of its southern neighbor, it has considerable relative strengths. Its banking system is more tightly regulated, so indulged less intensively in the subprime mortgage and derivatives shenanigans that brought the U.S. system to its knees.
The Canadian government was also more disciplined in terms of fiscal stimulus at the bottom of the recession. As a result, the 2010 budget deficit projected by the Economist panel of forecasters is only 4.5 percent of GDP — against 8.9 percent in the United States. Further, Canada has a relatively larger resources sector than the U.S. economy, an advantage when energy and commodity prices are drawn upwards by largely Asian demand.
The Bank of Canada has begun to reverse the stimulative monetary policy it adopted in April 2009, raising its target overnight interest rate twice so far to a current level of 0.75 percent. Even if that’s now held steady, the central bank has more leeway than the Federal Reserve with its near-zero rates. Meanwhile, 10-year Canadian government bonds currently yield 2.77 percent compared with 2.47 percent for U.S. Treasuries, so savers are marginally closer to getting a decent deal. Canada’s savings rate jumped to 5.9 percent in the second quarter, close to the 6.1 percent seen south of the border.
Real final demand growth in Canada is showing no sign of slowing, and energy and commodity prices remain high. Unemployment at 8 percent of the workforce is considerably lower than the 9.5 percent jobless rate to the south. And Canada’s fiscal and monetary positions both look closer to long-term sustainability than the U.S. equivalents.
That makes any possibility of a home-grown double-dip recession seem remote — although a severe second downturn in the closely-linked U.S. economy could hurt Canada too. Overall, though, it’s Team Canada that has a clear economic edge.