kEiThZ
Superstar
PUBLICATION: National Post
DATE: 2009.02.11
EDITION: National
SECTION: FP Comment
PAGE: FP15
BYLINE: Jeremy Leonard
SOURCE: Financial Post
WORD COUNT: 873
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Advantage Canada; The recessionary drop in U. S. consumer spending is not the same threat to Canada's economy that it once was
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Being as close as we are geographically to the United States, it is irresistibly tempting to assume that our economic destiny is inseparable from that of the Americans. In one sense, the numbers seem to speak for themselves, and are oft repeated: over three-quarters of our exports are sold in the United States -- this percentage has risen in the wake of continental free trade -- and we are therefore chained to the U. S. business cycle through good times and bad.
This "joined-at-the-hip" view is not an accurate description of current economic reality. U. S. exports represent only about a quarter of Canada's total economic output, and it is too often forgotten that we have a domestic market of 30 million people and hundreds of thousands of businesses that collectively spend $1-trillion annually on goods and services right here in Canada. Thanks to a commodities boom that started in the early 2000s, that domestic market has flourished, enriching not only the resource-producing provinces but Canadians across the country.
The engines behind this boom are the large emerging-market nations -- China in particular. This second important pillar of Canadian economic strength has buoyed our economy in the first decade of the 21st century, and will continue to do so in the aftermath of the recession.
A closer look at the proximate causes of the U. S. economic meltdown shows significant differences in underlying fundamentals that put Canada on much more solid footing. Much U. S. consumption over the past several years has been supported by housing wealth, which increased by an astonishing 66% from 2001 to 2007.
But since mid-2007, aggregate household real estate wealth has declined by nearly 15% in the United States -- the first sustained absolute decline in more than 50 years. Unprecedented levels of U. S. consumer indebtedness mean that spending power has essentially evaporated.
Household debt rose from 100% of disposable income in 2001 to a staggering 140% in 2007. Relative to income, Americans took on more debt in the last six years than in the prior four decades, and it will take time to get their balance sheets in order.
In Canada, most homeowners are in dwellings that they can afford, and the residential mortgage delinquency rate has, in fact, been trending downward for the past several years -- in sharp contrast to an increase of 50% to historical highs in the United States. Furthermore, unlike in the United States, consumption here has been underpinned primarily by strong income growth rather than by tapping home equity. The U. S. personal savings rate has averaged well below 1% of disposable income since 2005, compared to 2% to 3% in Canada. Thus, Canadian households have more savings to dip into to sustain consumption through this cyclical downturn.
Canadian consumers are in better shape because of the commodities boom. Canada has benefited from soaring demand and high prices, which have not only enriched the natural resource sector directly but also led to a significant increase in broader purchasing power.
This improvement in the "terms of trade," as it is known in economic parlance, has transferred hundreds of billions of dollars from resource-consuming countries to Canada. In such a situation, gross domestic product can significantly understate the true purchasing power of an economy.
While the strength of U. S. market demand is of critical importance to Canada's economy, these effects are heavily concentrated in the manufacturing sector, which accounts for the lion's share of exports to the United States. But manufacturers produce only about 15% of total Canadian economic output. Even in Ontario and Quebec, the factory heartland of the country, manufacturing's share of output does not exceed 20%. So reductions in U. S. demand for Canadian exports alone will not necessarily drag the entire Canadian economy into recession.
In a seemingly endless stream of gloomy economic news emanating from the United States, Canadian policymakers should step back and recognize the tectonic shifts in the global economy that will help counteract the U. S. downdraft. Yes, Canada is heading for a recession (as the recent dismal employment numbers confirm), but with smart policies to improve the competitive posture of manufacturers (which have already been hard hit by the U. S. slowdown) and a far more modest and targeted stimulus package than currently being contemplated by the Americans, it will be shorter and shallower than theirs.
Canadian consumers are nervous, but have much more savings than their American counterparts, giving them a decided advantage in purchasing power. More important, the growing importance of China and other emerging markets with regard to global commodities demand may be in the process of doing what decades of trade diversification policies have tried (and failed) to do: prevent us from becoming deathly ill when the U. S. sneezes. - Jeremy Leonard is a senior fellow at the Institute for Research on Public Policy. This article comes from the February issue of its magazine, Policy Options.
DATE: 2009.02.11
EDITION: National
SECTION: FP Comment
PAGE: FP15
BYLINE: Jeremy Leonard
SOURCE: Financial Post
WORD COUNT: 873
--------------------------------------------------------------------------------
Advantage Canada; The recessionary drop in U. S. consumer spending is not the same threat to Canada's economy that it once was
--------------------------------------------------------------------------------
Being as close as we are geographically to the United States, it is irresistibly tempting to assume that our economic destiny is inseparable from that of the Americans. In one sense, the numbers seem to speak for themselves, and are oft repeated: over three-quarters of our exports are sold in the United States -- this percentage has risen in the wake of continental free trade -- and we are therefore chained to the U. S. business cycle through good times and bad.
This "joined-at-the-hip" view is not an accurate description of current economic reality. U. S. exports represent only about a quarter of Canada's total economic output, and it is too often forgotten that we have a domestic market of 30 million people and hundreds of thousands of businesses that collectively spend $1-trillion annually on goods and services right here in Canada. Thanks to a commodities boom that started in the early 2000s, that domestic market has flourished, enriching not only the resource-producing provinces but Canadians across the country.
The engines behind this boom are the large emerging-market nations -- China in particular. This second important pillar of Canadian economic strength has buoyed our economy in the first decade of the 21st century, and will continue to do so in the aftermath of the recession.
A closer look at the proximate causes of the U. S. economic meltdown shows significant differences in underlying fundamentals that put Canada on much more solid footing. Much U. S. consumption over the past several years has been supported by housing wealth, which increased by an astonishing 66% from 2001 to 2007.
But since mid-2007, aggregate household real estate wealth has declined by nearly 15% in the United States -- the first sustained absolute decline in more than 50 years. Unprecedented levels of U. S. consumer indebtedness mean that spending power has essentially evaporated.
Household debt rose from 100% of disposable income in 2001 to a staggering 140% in 2007. Relative to income, Americans took on more debt in the last six years than in the prior four decades, and it will take time to get their balance sheets in order.
In Canada, most homeowners are in dwellings that they can afford, and the residential mortgage delinquency rate has, in fact, been trending downward for the past several years -- in sharp contrast to an increase of 50% to historical highs in the United States. Furthermore, unlike in the United States, consumption here has been underpinned primarily by strong income growth rather than by tapping home equity. The U. S. personal savings rate has averaged well below 1% of disposable income since 2005, compared to 2% to 3% in Canada. Thus, Canadian households have more savings to dip into to sustain consumption through this cyclical downturn.
Canadian consumers are in better shape because of the commodities boom. Canada has benefited from soaring demand and high prices, which have not only enriched the natural resource sector directly but also led to a significant increase in broader purchasing power.
This improvement in the "terms of trade," as it is known in economic parlance, has transferred hundreds of billions of dollars from resource-consuming countries to Canada. In such a situation, gross domestic product can significantly understate the true purchasing power of an economy.
While the strength of U. S. market demand is of critical importance to Canada's economy, these effects are heavily concentrated in the manufacturing sector, which accounts for the lion's share of exports to the United States. But manufacturers produce only about 15% of total Canadian economic output. Even in Ontario and Quebec, the factory heartland of the country, manufacturing's share of output does not exceed 20%. So reductions in U. S. demand for Canadian exports alone will not necessarily drag the entire Canadian economy into recession.
In a seemingly endless stream of gloomy economic news emanating from the United States, Canadian policymakers should step back and recognize the tectonic shifts in the global economy that will help counteract the U. S. downdraft. Yes, Canada is heading for a recession (as the recent dismal employment numbers confirm), but with smart policies to improve the competitive posture of manufacturers (which have already been hard hit by the U. S. slowdown) and a far more modest and targeted stimulus package than currently being contemplated by the Americans, it will be shorter and shallower than theirs.
Canadian consumers are nervous, but have much more savings than their American counterparts, giving them a decided advantage in purchasing power. More important, the growing importance of China and other emerging markets with regard to global commodities demand may be in the process of doing what decades of trade diversification policies have tried (and failed) to do: prevent us from becoming deathly ill when the U. S. sneezes. - Jeremy Leonard is a senior fellow at the Institute for Research on Public Policy. This article comes from the February issue of its magazine, Policy Options.
