Canada's Economy Casts a Long Shadow Over its U.S. Counterpart

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Canada's economy has consistently outperformed that of the United States since the beginning of the financial crisis. And while it's showing signs of slowing down, Canada's pending decline will be far shallower than that of the United States, and its rebound more dynamic.

Canada's gross domestic product (GDP) expanded by 6.1% in the first quarter of the year – the highest rate of growth among developed nations – and the country is expected to lead Group Seven (G7) nations in economic growth for at least the next two years.

The reasons are many:

  • Canada's banking system is sound.
  • It has a generous bounty of resources.
  • Its economy is more service-based than it's been in years past.
  • Corporate interests have less influence over government policy.
  • And it has far less government debt.

"Suddenly, Canada is being held up as a shining light of sobriety, daring, common sense, and strong returns," says Money Morning Contributing Writer Jon D. Markman. "It largely sidestepped the entire global financial crisis of the past four years because its highly regulated banks were prohibited from securitizing mortgage debt to the extent that was widely practiced in the United States. Its banks also were banned from taking on high levels of leverage to make larger and riskier loans."

Already, Canada has recouped 403,000 jobs, or 97% of those lost in the recession. Employment rose by 93,200 in June – a number five-times greater than economists had expected – following a gain of 24,700 in May and a record-high surge of 108,700 in April.

True North
By comparison, the United States, which has a population 10-times larger than Canada's, only added 83,000 jobs in June. And if you factor in the loss of 225,000 temporary Census jobs, the United States actually lost 125,000 jobs. Worse, if you include "discouraged workers" who haven't looked for a job in the past four weeks, the U.S. labor force has shrunk by 974,000 in the past two months alone.

Canada's unemployment rate slid to 7.9% in June compared to 9.5% in the United States.

"Businesses are confident in our recovery and are hiring," Benjamin Reitzes, an economist at BMO Capital Markets told Bloomberg. "That should get the ball rolling on growth from a private sector perspective."

Indeed, Canada has already begun the process of reigning in its stimulus measures. The Bank of Canada (BOC) yesterday (Tuesday) raised its key interest rate a quarter of a point to 0.75%. That was the second such high in as many months.

However, the BOC also lowered its growth forecast for the next two years, citing persistent weakness in the global economy. The central bank said the Canadian economy would expand by 3.5% in 2010, 2.9% in 2011, and 2.2% in 2012. The BOC predicted in April that the economy would grow 3.7% in 2010 and 3.1% in 2011 and 1.9% in 2012.

The bank noted that "economic activity in Canada is unfolding largely as expected," but the global economic recovery is "not yet self-sustaining."

"Greater emphasis on balance sheet repair by households, banks, and governments in a number of advanced economies is expected to temper the pace of global growth relative to the Bank's outlook in its April Monetary Policy Report (MPR)," the central bank said. "While the policy response to the European sovereign debt crisis has reduced the risk of an adverse outcome and increased the prospect of sustainable long term growth, it is expected to slow the global recovery over the projection horizon. In the United States, private demand is picking up but remains uneven."

Indeed, the loss of growth momentum in the United States is expected to drag on Canada's economy in the second half – albeit less than it would have in the past. That's because Canada, while it has become more service-based, still relies on the United States as an export market.

With the U.S. market less willing to absorb its exports, Canada reported its third straight monthly trade deficit in June. The deficit of $487 million (C$503 million) was the largest in eight months, according to Statistics Canada. Trade will shave 0.8 percentage points off of Canada's economic growth this year, according to the BOC.

Canada's housing market and consumer spending are also believed to have peaked. Still, Canada's economy should widely outpace the United States', which is facing the possibility of a double-dip recession.

"We're not calling for a double-dip by any means," said Sal Guatieri, an economist Bank of Montreal, which believes the Canadian economy expanded by 2% in the second quarter.

For one thing, Canada's strong fiscal position gives policymakers added flexibility. The country's fiscal shortfall this year is projected at $33 billion, comfortably below 3% of total GDP. That compares to a $1.35 trillion budget deficit for the United States, which is equivalent to 9.2% of GDP.

"The last two U.S. recessions are solid proof that Canada is now better able to withstand strong headwinds from the south," said Jimmy Jean, an economist at Moody's Corp. (NYSE: MCO) "Not that they've decoupled altogether, but should a downside mild double-dip recession materialize, Canada's recovery would very likely survive."

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  1. Bart Hall (Kansas, USA) | July 21, 2010

    I lived more than 20 years of my adult life in Canada, and would add three comments:

    a) Canadian home mortgage interest is *not* tax-deductible, and all mortgages are 5-year term renewables, just like commercial mortgages both there and here in the States. Furthermore, Canadian banks were never pushed by politicians to lend money to people who could not pay, in part because Canada does not have certain highly urban, politically-favoured cultural groups common across the USA.

    b) Their banking system is so bloody good that I long for a Canadian retail bank, but there are only a few of them in the States, and none here yet in the Midwest. Americans have no idea how good a Canadian bank can be. Except for a couple of Alberta oil-country credit unions that failed in the early '80s, Canada has not lost a single bank since 1923. Yes, 23, not 33.

    c) The Canadian system of calculating unemployment is more inclusive than that in the US, and somewhat resembles American U-6 algorithms. In former years an 8% Canadian unemployment rate would have been roughly equivalent to about 5% in the States. By back-of-the-envelope calculations, Canadian unemployment is probably about only 40% of what it is right now in the States.

    Canada, like all nations, has its own set of problems: the Supreme Court declared much of its health care system to be unconstitutional because it violated "security of the person" on account of its unconscionable waits and failures to deliver service; there is no "freedom of speech" in any form that would be familiar to an American; outside Alberta the entire nation is profoundly hostile to evangelical Christians; their four easternmost provinces have been functional wards of the Crown for the last 40 years; and their Liberal Party (in power more than 75% of the last 80 years) is a classic brokerage party making American Democrats look like absolute pikers in terms of patronage, graft, and corruption.

    As with one's choice of a spouse, there's good and bad. You're attracted by the good and eventually decided whether or not you can deal with the bad. Canadian banking is very good — probably the best in the world — and it has provided an orderly, solid underpinning to the entire economy for a very long time.

    Canada hits its sweet-spot when the Tories are in power. One reason Alberta is such a bright light in Canada is that the Tories have run the province for the last generation, and for the generation before that by Social Credit, a social-conservative populist party. Compare it to any American areas run by Democrats for the last 70 years …

    • Robert Pinkus | July 24, 2010

      You provided a very biased set of facts, highly suspect.

      If Canadian conservatives are so wonderful, why did the explosion of high tech happen in the U.S. and at a time when a democrat was president?

      Why do so many Canadians come to the U.S. to live?

      Why do so many Canadian like their health care system.

      Why did the last two U.S. financial crises occur after years of conservative republican presidencies?

      Why have the biggest deficits (even including Obama's stimulus) get run up during republican administrations?

  2. Damian Moran | July 21, 2010

    Good overview Jason. Another major difference is the Bank of Canada is audited regularly. Thereby accountable for its policies and operations but more importantly fully transparent.

    Compared to its American counterpart the unaudited and fraudulent Federal Reserve. Who continues to defy and obstruct calls for immediate audits. Apparently having printed in the past, and now even more so, more $ than Americans know about. Engineering the greatest Ponzi economy in the history of mankind.

    With these so-far-successful defy and obstruction initiatives supported by Obama, Geithner and Bernanke. So much for the change and transparency Obama yapped about.

  3. Paul H. Boisvert | July 21, 2010

    Maybe we, meaning the U.S. government and business leaders, need to take a lesson from our northern neighbors and primary import/export source on how to run the country's economic systems.

    This article is very timely since the Fed Chairman is on the Hill today to talk about the "Economic State".

    Inaddition, I look forward to your articles on China.

  4. Werner Strohmeier | July 21, 2010

    Thank you for this overview. As a non US resident I shall concentrate my ressource investments on Canada. It looks like a safer destination than the US market, just for government's sake!

  5. Nick z. | July 21, 2010

    So here is the secret to why Canadian banks are solid.
    If you want to buy something that is valued at $100 dollars,
    the Bank is only allowed by law to lend you only 75% of the value
    meaning that it can give you a loan of $75, you would have to
    cover the rest which would be $25 or 25%.
    So a person with bad credit can still buy a house, or a car as long as that person can
    put down 25% of its value. And the banks due there due diligence to make sure
    the item is actually valued at the correct price.

  6. Kevin O'Rourke | July 24, 2010

    Hello gentleman!
    Great article and replies… thank you all for your opinions and time to make them!

    Now a life long Canadian who ventured into the US economy of Boston in 2005 with a new product for framing apartment buildings- Floor panels- now offered by most wall panel companies- about time!!
    BAD move… like most businessmen, we got tunnel vision and did not want the rocket to stop!! 2007 proved to break my back as the market started to implode. DONE!

    Allow me to give you all a few points that completely seperate our governments and our peoples differences in our thinking of GOD and country and government operations.
    Nor are we free from sin and mismanagement and corruption like every government-private sector relationship in the world!!!

    First of all, the above notes are mostly correct and I will address those points as well.

    1- we do not link our politians to what church they belong to and we do not want the decisions they make based on a book 2-5000 years old!!
    BIG DIFFERENCE, as politics and church is not good because BOTH become corrupt as one can point to in the USA and this is rampant and mostly hidden in the fabric of business and politics now. The seperation of state and church has allowed Canada to become a better country for its people and not bickerinig because church members have a hold on their politicans.. deep south stands out!

    2- Our health care is NOTHING like it is played in your media… it is all lies… I have a rare disease called Addison's disease and is hereditary- 3 of my 6 sisters has it now… and my father died from other illnesses brought on by this one as it is terminal- no cotrisone… dead in 36 hours, a little history will help you understand our system.

    .. if I lived in the USA, I would now be having to pay for my prescriptions… to stay alive
    and that cost is now paid for 90% by my wifes plan with Home Depot Canada. Now when I need to see my doctor… I have a little heart issue.. need to see the specialist… doctor calls, i have an appointment in a week or 2 and then all tests are done in the next days or weeks. I live in the Toronto area… this is normal… the media picks a slip up and make it out to be the NORM!! Oh, 5 of my 6 sisiters work as RN's and labtechs and their children are following them, so cannot be that now can it. We do not have to worry about paying or finding insurance that screw you when you need them.

    Perfect example of the difference is this that happened to my brother and his family: Mike owns and operates an Esso gas station he bought and started with my wife in 1984. 1992 his wife is having twins… they are born A 27 weeks premature. They and mom and dad come from small northern community 300 miles north of Winnipeg, Manitoba. This would of sent him and his family into bankruptcy because he never would be able to afford the premiums to be insured, and would of had to sell it all and go under.
    Today, as we can look at that money spent as a collective, the twins are 19 years old and in university to become BN's and work with their mother and aunts.
    To me when i was in Boston area… health insurance was all the men that worked for me would ask about, if i was up to date. Allot of money YOU ALL spend to pay those ridiculous salaries to ALL those VP's, Pres and ceo's of all those companies… not pay directly to the hospital like we do. HUGE SAVINGS… our total cost to cver EVERYONE is now 8.9% a couple years ago and your costs are nearly 12% and really NO ONE is covered.

    The mindset of nation building is the difference. We do not all have guns- who cares in a civil society… everyone having a gun does not make everyone equal because most DO NOT WANT TO USE IT… others do not care!

    Now we belive in our hearts that to help your fellow country person… we all live better. we have no stress about PAYING for the items we need…

    3- bankiing- we have 5 big banks and then credit unions and allunder the fed watchdog. Our banks got burnt by Enron to the tune of 6-7 Billion. That was the wake up call to NOT FOLLOW the US banks… we kept mostly to buy up banks and make them more canadian style as one man points out… safe, safe safe money in these banks and credit unions.
    Our past liberal prime mi=nister was our finance minister for 9 years be foer 03 when he became Prime minister… Paul Martin, he stood up to the banks on 02 and kept them from merging and doing whay US banks are allowed… they have a good place in canada and I think our bankers are TOO conservative in the past and with their holdings, they need to have loan loss funds that the supervisor sets for them to follow.

    they are expanding into the US buying small regionals and making them many state banking chain like they enjoy here in canada. He and the current PM did not allow US banks to set up retail… a saving ggrace again. Just conservative when it comes to banking no matter what party is in power.

    We cherrish these 3 things and once people are aware(like men that came here for a few weeks found out) we worry about other things but not our health care… the government here is scrutinized about deliveery and costs by provinces wants.. and the fed helps pay the costs.

    With wherre canada stands today… I think we are the #1 Country in the world… barring our taxes but better pay taxes than pay insurnce premiums for all that BS of HMO's, Insurnce companies.. and then hospitals…. we pay one not many!

    Come visit canada if you have not…. you will want to come back- it is 90 f in Toronto today with humidity it feels like 110… just like most of the US east and mid-west the last 3 weeks!!

    We are proud to be the melting pot of the world… with some of the lowest crime rates in the world. One large US city has more murders than our entire country of 34 million KOOL souls!

    I am buying penny stock gold and silver mining companies all here in Canada with intrests in US, Africa and South America… all have good results forth coming.. also Diamonds.. coloured diamonds in Saskatewan??? Go figure!!

    Have a good trading summer.. Sepptember is Miners month… reports start soon!

    This is just one persons opinion made up by many US and Canadian citizens view we came to agree on!

    KO

  7. Al Bickerton | July 24, 2010

    As a recently retired Cdn citizen, I can truly say this is ONE GREAT PLACE TO LIVE and has been for all my 65 years barring 5, was a great lace to work). Sure we belly ache a bit about some health care wait times, but I do not know anyone with anything seriously wrong who has not been able to be dealt with very fast. So you have to wait for a few months for a new knee or hip – it won't kill you , so get over it and stop bitching.
    The only other place I ever lived was 5 years in The Bahamas – which was also super – took me about 5 minutes to get used to no income tax. However, the lack of any income redistribution system leads to a very wide range between rich and poor and results in a higher crime level than we experience here. Yes we lock doors but there's never a personal safety issue where we live.
    Thanks for recognizing that Canada is a great place. Sadly, many Americans, (Including Dubya in his pre-election press clips) may not even know where Canada is let alone the wonderful attributes it has. Many of my best friends are American and we share these thoughts repeatedly.
    Al

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