The days of Canada gloating over its superior performance through and after the global financial crisis may be behind us. As economic growth begins to slow worldwide, moderate growth in the U.S. should overtake that of Canada.
What makes this contrast even sharper is the fact that the U.S. started its economic climb from the depths of the Great Recession.
At 2%, Canada’s growth is disappointing, Sherry Cooper, executive vice-president and chief economist at BMO Financial Group, told a lunchtime audience at The Economic Club of Canada last week.
“The Canadian economy never did experience the traumatic recession,” she says. “Our output gap is [therefore] much smaller and we have less pent-up demand.”
Worse, our trade deficit is further out of whack thanks to a major appreciation in the Canadian dollar, a function of enormous inflows of foreign capital to Canada. A strong loonie makes it more difficult to find foreign buyers, blunting Canadian manufacturers’ competitive edge.
Our pace of exports is declining, and the slack’s not being picked up by the domestic economy, which isn’t exactly firing on all cylinders.
Governor Mark Carney suggests the output gap will be closed by the middle of next year. And while he continues to ratchet down his growth outlook, keeping interest rates at 1%, he misses no opportunity to remind us the next big shift in monetary policy may be closer than we think.
In direct contrast, the U.S. Federal Reserve moved last week to ease monetary policy further by extending their forecast of low interest rates to mid-2015.
Read: Fed announces QE3
It’s hard also not to notice the U.S., having come off its 10% unemployment peak, is now creating jobs faster than Canada – and that’s “following many years of Canadian outperformance,” says Cooper.
And our consumer confidence, although higher than in the U.S., remains well below the boom year levels of the early 2000s. And as Canadians hold off on non-essential purchases, the scenario is unlikely to change any time soon.
There are no signs of an uptick in the Canadian housing sector, either. If anything, our federal government is going all out to deflate the sector that gets the bulk of the blame for unchecked borrowing and the record-high debt-to-income ratio.
Meanwhile, the long comatose U.S. housing market is showing signs of life.
“U.S. housing is finally stabilizing and improving; the foreclosure numbers have declined sharply [and] the inventory of unsold homes has gone down,” says Cooper. “The housing cycle is in the opposite place in Canada.”
As for the stock markets on both sides of the border, the TSX deteriorated dramatically starting in 2011, after outperforming the S&P 500 for seven straight years. This was mainly because our energy and materials sectors, as well as our banks stocks, beat those in the U.S.
“Year to date, we have significantly underperformed as the materials and energy sectors have been hurt by the slowdown in the global economy, [while] the U.S. bank have outperformed,” she says.
Fortunately, Canadian dividend yields remain high and stable.
“Unlike U.S. banks, not a single Canadian bank cut its dividend during the financial crisis,” says Cooper. “[Instead] all of them have increased their dividend yields.”
Given that short-term interest rates are a measly 1%, and long-term yield under 2%, it’s nothing short of extraordinary that Canadian bank stocks are yielding between 3.5% and 5%.
Moreover, unlike their counterparts elsewhere, Canada’s big banks are already compliant with the new global bank capital standards, as set by Basel III.
Cooper says this foreshadows an improvement in global economic activity.
“The worst is behind us and that opportunities for Canada and for much of the rest of the world continue to be substantial.”