Economic storm clouds part

Sun peeks out; Canada has a way to go to full recovery but the signs are looking better

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by L. IAN MacDONALD
The Gazette, Sunday, October 18, 2009

Things aren't all the way to good yet on the economic front, but the indicators tell us they're getting better. We're not at ša va bien yet, but ša va mieux.

Consider some of the leading and lagging indicators. On Friday, the consumer price index was actually down 0.9 per cent over the last year to the end of last month. Of course, that's excluding the price of energy, and only in the world of statistics would the cost of living exclude the cost of driving your car and heating your home. But even when energy is included, the CPI rose only 1.3 per cent over the last year. While there were never fears for inflation in the recession, there were some concerns about deflation that, happily, did not materialize.

Employment? Well, it increased for the second consecutive month in September, adding 31,000 jobs, with the unemployment rate falling from 8.7 to 8.4 per cent.

But here's a number that's historically significant. Unemployment was lower in Quebec than Ontario last month, at 8.8 per cent compared with 9.2 per cent. No one can remember a time when Quebec's job market was in better shape than Ontario's. Historically, there has been a spread of about two points in Ontario's favour. This indicates perhaps the relative strength of Quebec high-tech sectors such as aerospace and pharmaceuticals, as well as the extent of the hit taken by the Ontario manufacturing sector, starting with the automotive industry.

The economy has been growing again since the start of the third quarter, and housing starts have increased from 130,000 in May to 150,000 last month, reflecting the availability of low-cost mortgages.

The stock market is a forward looking though not always rational indicator, and it's quite a story. From its low of 7,479 on March 6, the TSX has rallied to a recent high of 11,648, a gain of more than 55 per cent. In New York, the Dow has also rallied by 55 per cent, from a March low of 6,469 to 10,062 on Thursday.

And then there's the dollar. From a low of 77 cents U.S. on March 9, the loonie has soared to a high of nearly 98 cents against the greenback last Thursday, before settling back to 96 cents on Friday.

It's no mystery. Our dollar is a petro-currency, and the price of oil, which bottomed at U.S. $34 last winter, was at U.S. $78 on Thursday. There's also the matter of our fiscal frameworks compared to those of the U.S.

In our Keynesian moment of pump priming the economy, the predicted deficit of $56 billion is still less than three per cent of GDP, and the additional debt of more than $100 billion over the next several years will take the federal debt back only to 1997 levels, the year the books were famously balanced. By comparison, Barack Obama's projected deficit of $1.4 trillion in the new U.S. fiscal year is more than 10 per cent of output, and the U.S. national debt is approaching 100 per cent of GDP, the point where the international financial institutions usually show up and ask for the keys to the car.

There is nothing in any of these numbers, from the CPI to the exchange rate, that would cause Bank of Canada Governor Mark Carney to increase his overnight lending rate to the commercial banks from its historical low of 0.25 per cent, which he has promised to maintain through next June. That means the prime rate will remain at 2.25 per cent, with housing mortgages around a very affordable three per cent.

Carney certainly doesn't need a rate hike anytime soon to protect the dollar from the ravages of inflation. If anything, Carney has been talking the dollar down, on two public occasions this year, only to see it spike again. That'll teach him. Asked about the dollar the other day, Stephen Harper said there's nothing that can be done about it. Quite right. And that's as much of an opinion as the prime minister should have on the subject.

It's true that a surging dollar wreaks havoc on our exports, particularly in sectors such as forestry, furniture and automotive. Some major exporters, such as Bombardier, have avoided the fluctuations of exchange rates by denominating their sales in U.S. dollars. But for a small-to medium-size export business, you can imagine the stress of managing their margins around a currency that has rallied 27 per cent in only six months.

On the other hand, a strong dollar allows companies to invest in new computers and other high-technology equipment that is usually priced in U.S. dollars, creating productivity gains. Productivity is also enhanced precisely by the lower operating margins resulting from the higher dollar, as employers achieve efficiencies elsewhere in their systems. The strong dollar enables investors to diversify their retirement portfolios into stocks on the Dow as well as the TSX. It reduces the cost of imported fruits and vegetables, and enables Canadians to enjoy cheaper winter holidays in Florida.

The dollar will find its own way, and right now it is finding its way back to exchange- rate parity.

 
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