Decent Canadian recovery outshines sluggish U.S.

September 1, 2010

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.


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Let’s not forget, Canada was not heavily involved in two wars like the US, so it did not have the hulking deficit on its books before the recession hit.

Not sure the US could have avoided a conflict in Afghanistan after Sep 11, but the Iraq war was completely uncalled for. It now feels like the economy gods are punishing us for that folly. The US would have been in much better shape to offer large stimulus programs w/o creating a record deficit if the Iraq war had never happened. Shame on us. . . again.

Posted by mcoleman | Report as abusive

The big difference (not covered by this article)? Canada allows its private sector banking system to control the mortgage market. Consequently, there are no 30 year loans, only shorter term 5 year offerings. In most cases, without a Fannie Mae or Freddie Mac equivalent to backstop the mortgage market, Canadian banks hold their loans instead of off-loading them. As a result, banks have a stong incentive to underwrite their loans responsibly and prudently.
Contrast this situation to the U.S. where Fannie Mae and Freddie Mac have been used as instruments of Congress to expand home ownership. The policy of deliberately pushing mortgages to lower and lower credit-worthy applicants in a bid to meet Congress’ political agenda is the main factor responsible for the housing bubble and, ultimately, global financial crisis that ensued.
That and the fact that Canada (a traditional liberal country) has been governed by fiscal conservatives for the last 8 years explains the vastly different outcomes between Canada and the U.S. Those are the real lessons to be leaned from this sorry episode.

Posted by richjacy | Report as abusive