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A number of factors don’t bode well for Canada’s economic expansion in the near-
term and for the valuation of the Canadian dollar in particular. GDP growth in 2012 was down to 1.8% from 2.6% the previous year. The nation’s central bank is holding the overnight rate at 1% and will likely maintain this level for some time to come. Words: 440; Charts: 7
So writes Walter Kurtz (www.soberlook.com) in edited excerpts from his original article entitled Why Canada’s Economy is in Trouble.
This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Kurtz goes on to say in further edited excerpts:
This weakness in Canada’s economy is clearly visible in the relative performance of the Canadian and the U.S. equity markets. The two markets, which have traditionally moved fairly closely together, have diverged recently.
S&P/TSX (Canada): blue, S&P500 (US): red
A number of somewhat related factors are driving this weakness in Canada’s growth. Here are some of them:
1. Canada’s exports are heavily concentrated in energy with a big focus on the nation’s largest trading partner, the U.S. and, as discussed before, the US energy markets are now quite well supplied. The US has a tremendous domestic source of natural gas, while crude oil inventories are high relative to historical levels – reducing demand for Canadian energy product in the U.S.. [read: The Major Imports & Exports Between the U.S. and Canada are Surprising and A Look at the Canadian Oil Sands: the U.S.’s #1 Source of Supply]
Source: EIA
2. Over the past decade the Canadian dollar has strengthened dramatically, and in spite of some temporary weakness during the financial crisis is still close to parity with the U.S. dollar. This makes Canadian products more expensive on a relative basis. [Read: How Much Higher Can the Canadian “Loonie” Soar Before Its Economy Gets Singed?]
Number of Canadian dollars per one US dollar (USD/CAD)
3. Canada’s housing evaluations have materially outpaced those in the U.S. There is a great deal of debate on this topic, but it’s quite clear that Canadians have been pumping significant capital (materially higher than 6% of GDP) into residential housing over the recent years – even as the US housing expenditures collapsed. [Read: Canada Could Be Developing a Minsky Moment In Real Estate – Here’s Why and Still NO Housing Bubble in Canada – So What Will Cause Prices to Finally Correct?]
Source: DB
4. Canada’s manufacturing labor costs have sharply outpaced those in the U.S. over the past decade making Canadian firms less competitive.
Canadian unit labor costs: blue, US unit labor costs: red
5. Mexico, with its cheaper labor and a growing manufacturing base, is increasingly taking Canada’s export share into the U.S..
Source: Deutsche Bank
6. Canada’s current account has been in the red for some time now driven, in part, by the strength of the Canadian dollar as well as worsening labor competitiveness. What’s particularly troubling is Canada’s deterioration of the current account outside of energy exports. The trend is making the nation increasingly reliant on its energy export just as the demand from the U.S. declines.
Source: Deutsche Bank
Conclusion
The above developments don’t bode well for Canada’s economic expansion in the near-term and for the valuation of the Canadian dollar in particular.
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://soberlook.com/2013/03/why-canadas-economy-is-in-trouble.html (Content copyright 2009-2013. SoberLook.com. All rights reserved; Subscribe by Email)
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