What Weak US Data Mean for Canada

By David Dittman • June 10, 2011 • Canadian Edge Weekly

If Barack Obama could post 3.6 percent annualized GDP growth and a 7.6 7.4 percent unemployment rate to www.whitehouse.gov he’d be cruising toward the most resounding reelection since Ronald Reagan’s in 1984. Of course his plight qualifies as a relatively good problem to have–even if he becomes a former president sooner than planned he’ll have plenty of opportunities to make money. The same can’t be said for a lot of Americans.

Stephen Harper, who recently claimed his defining political victory–but only after two previous semi-successful campaigns and the searing experience of managing a world top 10 economy through a severe global recession–can boast of such numbers. You can find at www.statcan.ca.gov, in the “Latest Indicators” box in the right column, midway down the homepage.

You’ll also find a population number of about 34 million and an annualized CPI inflation rate of 3.3 percent. It’s a small country–particularly relative to its resource base, which explains in part why it’s a compelling investment story–and inflation exceeds its central bank’s target, yet two more ways its condition differs from its giant, struggling neighbor to the south.

We have updated evidence of Canada’s relative strength this morning, in the form of an employment report that revealed the addition of 22,300 new hires in May, a slightly better than forecast number but still only average for the Great White North in its recovery. It provides stark contrast for what went on with US jobs figures this week; the unemployment rate south of the border crept to 9.1 percent in May from 9 percent, a trend that threatens to make Mr. Obama a one-termer.

Meanwhile Statistics Canada’s Friday morning report suggests a healthy move toward full-time, private-sector employment, though the number created exceeded the 20,000 consensus expectation only modestly and was down from the 58,300 new hires in April. One factor that contributed to the surprising move from a 7.6 percent to a 7.4 percent unemployment rate is that fewer people sought work, a negative in the real world.

The Bank of Canada (BoC), which last week held its target overnight interest rate steady at 1 percent, expects growth in Canada to be increasingly driven by private investment rather than government spending through 2011 and into 2012.

There are other flies in the Canadian ointment–wages increased 2.2 percent, less than the current 3.3 percent inflation rate, which makes for a potential drag on consumption; manufacturing jobs, though still higher than year-earlier levels, fell by more than 20,000; the number of self-employed was a worrisome share of the total number of new full-time workers–but there is no question it remains the healthiest economy on the continent, if not the entire developed world.

Sooner or later, you say, because US-Canada is still the world’s biggest bilateral trade relationship and 70 percent of Canadian exports simply move across the border, our neighbors to the north will fall ill. And in a roundabout way–but only in a roundabout way–that may be true.

What we know about the 2007-09 downturn is that it brought low just about the entire world, except Australia, which never officially entered recession. Business investment and exports held up in the Land Down Under, to the surprise of Australia’s Dept of the Treasury and a lot of other forecasters, and it didn’t hurt that the government joined the rest of the advanced world in spending a lot of money on stimulus programs.

Big projects remained on track, as Asia’s emerging markets continued to consume output from Australia’s mining industry. Canada, too, enjoyed a relatively easy recession, as, contrary to Mr. Obama, Mr. Harper inherited a decade of bipartisan budget discipline and significant though comparatively light global security burdens.

That’s not to say Mr. Harper didn’t make decisive moves; shedding his ideological girding, the Prime Minister signed an aggressive stimulus package, too. But he’s also working on getting a budget passed that’ll bring Canada back to budget balance by mid-decade.

Research by l’Université Laval Professor of Economics Stephen Gordon, who blogs at Worthwhile Canadian Initiative and contributes to the Toronto Globe & Mail, paints a pretty clear picture of what’s going on with Canada and why it’s been able to ride out this seismic shift in the global economic growth profile. The combination of the end of cheap-and-easy crude, and inexorably rising demand for energy from emerging markets is a strong tailwind because the most important single factor in Canadian growth is the price of oil.

Weak economic data in the US and persistent danger of sovereign defaults on the periphery of the European Union are threats to the Canadian economy, but only to the extent that those issues ultimately infect other economies and destroy demand for commodities, primarily oil.

According to Professor Gordon’s research, the current recovery and the 2002-08 expansion are driven by income gains generated by higher prices that Canadian exports receive on world markets. This extra income is a source for stronger made-in-Canada demand for Canadian goods and services. It also creates an increased demand for imports, which explains why net exports are typically weak during expansions.

The outlook for export volumes–colored right now by fear of a strong loonie–isn’t the biggest problem for the Canadian economy. The biggest threat is that a stalled US economy combines with softer European growth and spills onto the rest of the world. Another global recession, like the 2007-09 episode did, will bring down the price of oil and other commodities.

“The resulting reduction in the prices Canada receives for its exports,” concludes Gordon, “is the mechanism by which a US slowdown would affect Canada.”

This week’s widely watched meeting of the Organization of Petroleum Exporting Countries (OPEC) underscores the fact that we’ve entered an entirely new era for the price of oil, however, that double-underscores the importance of Canada to US energy security in coming decades. The word from observers who follow OPEC closely is that this meeting was so contentious that the group’s ability to hold down the per barrel price of crude is now in serious question.

At the end of the day, while geopolitical tensions have serious implications at the margins–it’s all about supply and demand. Here, too, there is bullish news for Canada and the price of oil: According to the Energy Information Administration, the pace of growth of global oil demand is quickening.

The EIA said earlier this week in its short-term energy outlook for June that demand will grow by 2 percent this year, or 1.7 million barrels a day, to a record 88.43 million barrels a day on higher electricity generation in the Mideast, Japan and China. That’s up from 1.6 percent growth forecast in May. China, the second-biggest oil consumer after the US, will use 9.87 million barrels a day, up 7.6 percent, or 700,000 barrels a day, from a year ago. That’s an increase of 120,000 barrels a day from May’s forecast.

The condition of the US economy is a concern for Canada and always will be. But it is no longer the only relevant factor in the equation. The big picture is generally positive for Canada right now; it’s still one of the best markets on the planet for total-return investors looking to build wealth over the long term. And today, in the last in a series of Flash Alerts to subscribers covering the recent reporting season, Roger Conrad sums up numbers for the last Canadian Edge Portfolio Holdings to report on the first quarter of 2011. Once again we’re seeing that high-yield Canada is a profitable way to play a great global economic shift.

The Roundup

Out today is the penultimate Flash Alert of first-quarter 2011 earnings reporting season for Canadian Edge Porfolio Holdings. Here’s where you can find reports for specific Holdings; simply click the article names of those companies you’d like to check up on. We’ll issue another Flash Alert after Northern Property REIT (TSX: NPR-U, OTC: NPRUF) reports its first-quarter numbers on Jun. 14 and discusses them with analysts and investors on Jun. 15.

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