With America’s economy in increasingly greater turmoil, it’s hard not to think that Canada’s relatively stable economic status will eventually crumble. However, Jeff Rubin, CIBC’s chief economist and chief strategist, says there’s nothing to worry about.
In the bank’s latest economic forecast, Rubin says that Canada’s energy and resource rich economy is still thriving thanks to climbing global commodity and energy prices. “This has translated into soaring growth in Canadian personal and corporate incomes,” says the report. “Those gains show up in a very healthy increase in domestic spending and enriched government coffers.”
Due to the economic strength, Rubin predicts the Canadian dollar will hit $1.05 by the end of the year.
The decoupling of global economies is the main reason why Canada’s resources can continue to perform well while the U.S. struggles. “The resource sector still enjoys booming economic conditions,” says Rubin. “It will continue to do so over the next four quarters, irrespective of the pace or timing of a U.S. recovery.”
Rubin points out that the high oil and commodity prices haven’t just resulted in more jobs for the oil industry — the growth has benefited all parts of the Canadian economy. “Government revenues have grown from royalty rents and soaring corporate income taxes which have funded a national public sector hiring spree, huge infrastructure spending and fresh tax cutting initiatives,” he says.
Of course, there is some slowdown in our economy, but that’s “entirely external” says the CIBC report. In fact, if we weren’t connected at all with America, economists would be writing about a Canadian boom.
The report explains that if the Great White North were an “island unto itself that talk would be about a boom, not a recession risk, given the strength of final domestic demand, and particularly, consumer spending, which was up more than 7% annualized in the fourth quarter of 2007.”
Rubin doesn’t think Canada’s strong showing will continue at the same pace, but “solid household income fundamentals and more interest rate cuts” should be enough to maintain a 3% pace to real consumption this year, even if the jobless rate temporarily increases over the summer.
Canada’s economic performance isn’t all rosy, however. The poorly performing trade and manufacturing sectors are still hurting the country. “While the U.S. economy has relied on its trade sector to offset a contracting domestic economy, north of the border, the opposite has held,” he says. “The trade sector has acted as a drag on GDP growth in the face of huge, largely resource-driven gains in domestic spending. It is in domestic demand growth, much more than in GDP growth, that the relative strength of the Canadian economy is most apparent against the U.S.”
Manufacturing in particular will suffer as a result of an American recession and high Canadian dollar. Rubin says Ontario will be hit hardest with a possible provincial recession on the horizon.
As a result of these two economic drags, Rubin expects the Bank of Canada to drop the overnight rate another 75 basis points — to 2.75%.
Even though Canada’s not feeling the affects of a slowdown the same way the American’s are, the sooner the U.S. bounces back the better. Rubin thinks that while a recession south of the border will likely happen, it will be short lived.
“Stateside, a lot of ammunition is being spent fighting the recession,” he says. “A plunging federal funds rate, some $100 billion in reserve lending from the Federal Reserve Board, and a likely Congressional fiscal bailout of some $300 billion in sub-prime mortgages should power the American economy out of recession by the second half of the year.
“In the interim, North American stock markets will have to hold their nose to some ugly non-farm payroll losses and some real, if modest, shrinkage in GDP, just as a rate cutting Fed has to hold its nose to the odour of a four per cent-and-rising CPI rate,” he explains.
Rubin’s not the only one unconcerned about an American recession. According to a new Edward Jones poll, 57% of Canadian investors have no plans to alter their portfolio, even when faced with a U.S. economic downturn. In fact, 12% plan to invest more.
Kate Warne, Edward Jones’ Canadian market strategist, says investors should consider adding stocks that have declined, but represent good value, to their portfolio.
“Like a sale at your favourite department store, fears about a recession, and the market declines tied to those worries, can give long-term investors a chance to purchase attractive investments at very reasonable prices,” she says.
Warne recommends that investors look for quality dividend-paying stocks from companies that have increased their dividends over the years. Some people might also want to consider high-quality U.S. bonds as they have a higher yield than the Canadian ones.
In contrast to Rubin’s predictions, Warne thinks the TSX will be more volatile thanks to the “sensitivity” in the energy sector. Materials will also cause problems for the markets, so diversifying is the only way investors can really protect themselves.
“The economic weather forecast may be calling for thunderstorms, but investors who remain diversified, continue to invest, and recognize the long-term opportunities a recession can provide, will have no trouble spotting the sun through the clouds,” she explains.
Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(04/14/08)