Canada's turn in the sun

www.globeandmail.com By MATHEW INGRAM Globe and Mail Update

When the Internet frenzy was at its peak, the United States was seen as the pinnacle of economic perfection, while Canada was a sleepy backwater of oil drillers and tree choppers. Now the tables have turned, and Canada is growing while the U.S. struggles to find its footing, amid war fears and a rising debt load. But how long can our fortunes and those of our major trading partner continue to go their separate ways?

As the rising loonie and bullish job-growth reports amply illustrate, all the various stars seem to have lined up for Canada recently, economically speaking. While the United States deals with a ballooning trade deficit — something that has contributed to the pressure on the U.S. dollar, since it implies that the American economy is too weak to support itself — Canada's trade surplus has grown, thanks to demand for commodities.

The United States is wrestling with the prospect of runaway budget deficits that could total $1-trillion (U.S.) over the next five years, adding to a debt that is already so huge Congress has been forced to ask for approval to lift the legislated debt ceiling from its current level. Despite high spending by Ottawa, Canada is likely to have a series of large budgetary surpluses, and the debt has been reduced (somewhat).

Over the past six months or so, each time the new job numbers for Canada came out, economists and other analysts were flabbergasted by the strength of the economy, as job growth blew away even their most optimistic forecasts. Last year, Canada's job market grew by 3.7 per cent, the largest increase in 15 years. In the United States, meanwhile, unemployment rates remain high as companies continue to cut back to reduce costs.

Despite the sluggish overall economic growth south of the border, sales of cars and houses continue to rack up new records in the United States — and both of those markets rely heavily on supply from Canada. The lower Canadian dollar makes it more cost-effective for American companies to buy from us, and to focus on their Canadian assets if they do business here, as lumber giant Weyerhaeuser and most of the major auto makers do.

When it comes to commodities, the two we specialize in that have boosted the economy the most recently are oil and natural gas. As strikes in Venezuela and fears of war in Iraq have crimped the global supply of crude oil and driven prices up dramatically, Canada has benefited handsomely — and more recently, the same effect has occurred with natural gas. The Scotiabank Commodity Index climbed by 5.7 per cent in January and is up 23 per cent over 2002, while energy prices are up 87 per cent.

Canada turned in overall economic growth (as measured by gross domestic product) of about 3.3 per cent in 2002, the best performance of any of the major G7 industrialized countries, and better than the U.S. for the third year in a row. More than half a million jobs were added — although productivity advocates said this kind of job growth wasn't necessarily reason for celebration, since it meant Canada was adding workers instead of trying to become more efficient, the way the United States economy is.

Despite the currently sunny outlook, there are economic clouds on the horizon. Whether they wind up turning into a storm remains to be seen. The largest is the simple fact that Canada's economy is tied so closely to that of the United States, with more than 80 per cent of our exports heading south in an average year. If the U.S. economy remains weak, that is bound to impact our growth eventually, even if we are currently immune.

Canadian money manager Brian Trenholm of Agilerus Investment told Dow Jones that he thinks the U.S. economy will remain weak this year and next, and that this raises the risk that Canada's strength will slow as well. "I think the Canadian economy will follow the U.S. economy. There's a bit of a lag because our currency is currently weak," he said. As the dollar rises, "that will have a dampening effect on some export industries... so I think that will help to temper the Canadian economy."

Signs of that have already appeared, with Canada's trade surplus falling in December to $4.1-billion (Canadian) from $4.3-billion in November. For the full year, the trade surplus sank $9.4-billion to $54.6-billion — the lowest since 1999. "The ongoing woes of the U.S. economy have dealt a blow to Canada's export sector over the past few months, and December's tally was certainly no exception," economist Marc Lévesque of Toronto-Dominion Bank said recently. Exports dropped by 0.3 per cent in December.

It's true that Canada's economy is basking in some powerful sunlight at the moment. Hopefully, the clouds on the horizon will break up before they turn into anything serious — but with an economy the size of the U.S. sitting right next to us, you never know.

E-mail Mathew Ingram at mingram@globeandmail.ca