Canada’s economy has pulled out of last year’s slowdown with gusto, and will likely run circles around its U.S. counterpart for the rest of 2002, say TD economists.
“The U.S. recession may be over, but the U.S. economy is still struggling to take full flight. In Canada, we are already soaring,” says Don Drummond, chief economist of TD Bank Financial Group, in the latest issue of the TD Quarterly Economic Forecast.
“One need look no further than the stunning performance of the Canadian labour market to understand just how remarkable Canada’s economic rebound has been,” he adds.
While the U.S. economy continued to shed jobs until May, Canada’s economy has created 237,000 positions in the first five months of the year – its strongest gain since 1994.
“The first-quarter GDP results paint a similar picture,” says Drummond. “Both countries recorded strong rates of GDP growth, but the bulk of Canada’s gain came through strength in final demand, suggesting that economic growth is more firmly anchored on this side of the border.”
With only a tepid showing from the U.S. economy expected for the remainder of the year, the key issue is whether the Canadian economy can keep its shine. The TD economists believe that it will.
“Some may argue that Canada has never done better than the U.S. powerhouse over an extended period of time, but that is not quite true,” says Drummond. “The Canadian economy grew faster, on balance, than its U.S. counterpart during the 1960s and 1970s.
“Canada’s sub-par performance is largely a late 1980s and 1990s story – a period when Canada was struggling with the consequences of high inflation, runaway budget deficits, mounting public and external debt loads and in some sectors of the economy, a fairly painful adjustment to free trade. These are problems that have either been solved, or on which significant progress has been made,” he says.
The economists point to a number of factors highlighting that the cards are stacked in Canada’s favour:
* Canada’s economy was not battered as heavily as the U.S. economy after Sept. 11, and is clearly taking less time to heal.
* Corporate profits and business investment appear to be turning the corner faster than in the U.S., in part thanks to the smaller weight of the high-tech sector in Canada’s economy.
* Rising commodity prices will boost Canada’s resource-based sectors.
While the Canadian and U.S. economies ended last year with about the same amount of excess capacity built into their economies, Canada’s will be eaten up much more rapidly.
“By the end of the summer, the Canadian economy could be running close to full capacity,” notes Drummond.
As a result, he expects the Bank of Canada to raise interest rates by another 1.25 per cent this year and a further 1.25 per cent in 2003.
