Saturday, July 10, 2010


Confidence: Canadian business has it; U.S. doesn't

Paul Vieira, Financial Post · Friday, Jul. 9, 2010

OTTAWA -- Somebody forgot to tell Canada that the global economy is slowing down and, worse still, at risk of falling into the throes of a double-dip recession.

Jobs data for June were simply “off the charts,” said Michael Gregory, senior economist at BMO Capital Markets, in describing the 93,200 gain in employment for the month. The result caps a record three-month performance in terms of employment levels, with 227,000 new jobs added. This gives Canada the honour of being the first Group of Seven economy to nearly recoup the job losses sustained during the recession, and Canada did so at a faster pace than the downturns of the 1980s and 1990s.

The numbers are impressive on their own, and even more so when compared with the mighty U.S. economy, which last month recorded a net job loss of 125,000. Since July of last year, the Canadian economy has added 403,000 net new jobs. Meanwhile, the United States churned out 176,000 positions, and its payrolls remain 5.4% below peak levels.

This gigantic gap between Canada and the United States comes down to one thing.

“The root of it is confidence,” said Derek Burleton, deputy chief economist at Toronto-Dominion Bank. “In the U.S., employers are not very confident. They are worried. But in Canada, businesses are dealing with a domestic economy that has been far more resilient through the recession. They are feeling quite confident.”

For instance, Mr. Burleton said U.S. companies might be scared off by the size of the trillion-dollar budget shortfalls Congress is racking up on an annual basis, with no clear near-term plan to rein it in especially ahead of mid-term elections. “If you are a company and you are looking to invest, you have to factor in the cost of future tax changes. That’s not driving all the decisions but that is a factor.”

Canada’s deficit has ballooned, but in contrast Ottawa has outlined a strategy to get back to budget balance by mid-decade. In fact, the shortfall for the fiscal year just passed may turn out to be as much as 13% less than the $53-billion forecast, based on preliminary estimates.

Unlike Canada’s recessions of the 1980s and 1990s, this downturn emanated from abroad — the result of excessive risk-taking in real estate by U.S. and European lenders. Canada’s financial system didn’t suffer to the same degree, due to conservative lending practices and tighter regulation, and so it was able to keep credit channels open during the worst of the global downturn.

Canada’s GDP shrank 3.3% from peak to trough during the three-quarter downturn, but that was mostly due to a collapse in global demand. Alas, the manufacturing industry accounting for half the drop in GDP during the recession.

Meanwhile, the services sector hummed along, with employment growth taking off as it dealt with robust domestic demand (expanding at a roughly 5% annualized clip in each of the last three quarters). The service sector accounted for the bulk of new jobs in June, and economists at National Bank Financial noted employment in services is now 2.2% above the pre-recession peak, or the equivalent of 287,000 new jobs.

The strength of the domestic economy will likely push the Bank of Canada to raise its benchmark rate again at its coming July 20 meeting, analysts say. As it was the first G7 member to recoup lost jobs, Canada was also the first to raise interest rates from emergency levels of 0.25%, or the lowest possible level.

The emergency-level rates “helped restore domestic demand since the end of the recession. Now that the goal has been achieved, such a policy is no longer warranted,” said Yanick Desnoyers, assistant chief economist at National Bank Financial.

With analysts agreeing that record-low rates succeeded in spurring job creation, questions emerge as to whether it was necessary for federal and provincial governments to carry out $60-billion-plus in spending to boost what proved to a pretty resilient domestic economy.

“At the time, no one knew where we were headed. Maybe in retrospect the full amount of stimulus wasn’t required, but hindsight in 20/20,” said Mr. Burleton, adding the Conservative government was initially skeptical about stimulus based on the strength they saw in domestic fundamentals.