On an economic basis, Canada has weathered the slowdown in economic growth fairly well and certainly...
On an economic basis, Canada has weathered the slowdown in economic growth fairly well and certainly better than many other G7 economies.
Despite its close ties to the US, the weakness of the Canadian dollar is currently providing a comfort level against a slow US economy.
Over 2002, the Toronto Stock Exchange Composite index fell 11.5% in US dollar terms compared to the S&P 500 drop of 22.09%.
As an export-orientated economy, Canada's main trading partner is still the US. Its currency has long been considered volatile and weak compared to its US counterpart and over the past year suffered, dropping to between 63 and 64 US cents for every Canadian dollar. This compares with 10 years ago, when it was closer to 72 US cents.
Adam Smears, senior fund analyst at Fidelity International, says: 'When you have a low currency, it makes you better able to compete and sell products into foreign markets. Canadian products and Canadian goods look attractive to US buyers who would normally source domestically but are now buying from Canada.'
Jonathan Fry, joint managing director of Premier Asset Management, adds: 'Despite all the worries about the US economy and financial markets, Canada's economy rebounded fairly strongly in production and spending terms in 2002. Recovery strength was concentrated primarily in consumer spending, housing and exports.'
In the long term, however, the risk is that the Canadian economy could suffer from persistent slow growth in the US due to its strong ties to its southern neighbour. Fry adds: 'Because the two economies are so close, if it were not for politics, you could see Canada being a state of North America, Canada is going to struggle to go its own way if US problems continue.'
Fry expects consumer spending to continue to play a key role in sustaining economic activity until corporate revenue growth and expenditure gains a stronger foothold.
He says: 'Unfortunately, the US economy's recent struggles are starting to affect Canada's foreign trade surplus. Although the trade surplus widened to a six-month high of C$5.1bn in October, fuelled by strong energy exports, Canada's surplus with the US edged down by C$140m to C$8bn, while the deficit with other countries has narrowed to C$3.3bn.
'On the other side, the most interesting observation is that imports of machinery and equipment were up slightly in October, which bodes well for business.'
Smears notes there is more inflationary pressure in Canada than in the US and, as a result, interest rates have been raised over the past year. He adds: 'Occasionally there is a divergence between the US and Canada and this is one of those occasions. Canada is doing better because of its lower currency, which makes it a more attractive trading partner.'
There is higher social spend by the Canadian government than the US, which tends to support a higher inflationary stance, Smears says. The economy is also more geared to commodities so the recent upturn in commodity prices has impacted on inflation, he notes.
Weak dollar a plus for exports.
Rise in commodities boosts economy.
Consumer spending is still strong.
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