(This article was originally published Monday.)
By Don Curren
Of DOW JONES NEWSWIRES
TORONTO (Dow Jones)--Canada is now poised to fly higher than the U.S. and other industrialized countries as it escapes the serious economic turbulence of the world recession, including the worst quarterly contraction on record.
Several factors should fuel a more rapid takeoff to recovery for Canada, including a robust banking system, healthier balance sheets among businesses, households and government, and greater exposure to resurgent Asian economies through commodities.
"It`s a complete slam dunk that we`re going to outperform the U.S. for many years to come," said David Rosenberg, chief economist and strategist at Gluskin/Sheff in Toronto.
Analysts caution, however, that Canadian outperformance might take awhile to emerge as the U.S. benefits from a larger domestic stimulus package and the bigger bounce from a deeper economic hole. Statistics Canada reported Monday morning that Canada`s gross domestic product contracted by 3.4% at annual rates in the second quarter, considerably worse than the 1.0% contraction reported in the U.S.
Key among the positives for Canada is probably the health of the country`s financial system.
Canada`s banks did suffer write-downs resulting from exposure to subprime mortgages and other troubled assets classes in the U.S., but remained essentially healthy throughout the credit crisis. They neither received outright government bailouts nor cut dividends and continued to provide credit to the household and business sectors.
Helping underpin the banks was the relative stability of the country`s housing market, which suffered a serious correction, but not the outright housing collapse seen in the U.S. Cultural, legal and institutional differences between the two countries prevented the kind of excesses that occurred in the U.S., with conservative borrowing standards resulting in a considerably smaller subprime mortgage market.
Unlike the U.S., Canada`s recession was not an essentially a domestic affair. It originated outside the country as ebbing demand in the U.S. and elsewhere put pressure on exports.
Conditions in the domestic economy have remained healthier than in the U.S. The Canadian labor market has not deteriorated near as badly as that south of the border. From peak to trough, employment in the U.S. has declined by 4.8%, compared to 2.4% in Canada, according to Doug Porter, deputy chief economist at BMO Capital Markets.
Household wealth in Canada also took a smaller hit from dropping house prices and stock markets than in the U.S., helping reduce the impact on consumer spending, Porter said.
The relative health of Canadian household balance sheets also applies, in broad terms, to the corporate and government sectors.
After recording surpluses for 11 years, the federal government slipped into a deficit last year. Its deficit for the current 2009-10 fiscal year is projected to be C$50.2 billion for a deficit-to-GDP ratio of about 3.3%, compared to about 11.2% in the U.S.
While Canada`s exposure to exports was a significant negative heading into the recession, it could actually be a positive heading out. Canadian exports to the U.S. are heavily concentrated in sectors, notably automobiles and housing, that were among those hit hardest by the recession in the U.S., and are therefore likely to enjoy a bigger rebound.
Canada`s heavy reliance on commodity exports, also a negative as the recession unfolded, might also be beneficial as the recovery takes hold globally and demand and prices for commodities improve.
Its role as a commodity exporter gives it exposure to resilient Asian economies lacking in other G-7 economies.
That exposure to the global economy is one thing that could put Canada`s recovery at risk, says BMO`s Porter.
Another is continued strength in the Canadian dollar. That`s already drawn the attention of the Bank of Canada, which has identified the currency`s strength as an important risk. Other observers of Canada economy agree.
"The last thing the Canadian economy needs right now is for the Canadian currency to be as strong as it is," said Simon Parker, a professor at the Ivey School of Business at the University of Western Ontario.
(Don Curren, a reporter based in Toronto, has covered Canadian currency and fixed income markets for more than 10 years. He can be reached at 416-306-2020 or at don.curren@dowjones.com.)
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(END) Dow Jones Newswires
September 01, 2009 07:36 ET (11:36 GMT)
