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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