In the last few years, our northern neighbor has been a bright spot in an otherwise bleak global economy, with Europe and Japan being the financial and economic basket cases. Canada avoided many of the credit pitfalls that ensnared the rest of the global economy and looked strong with its manufacturing base of energy production. As we start 2014, we are seeing a reversal of fortunes. It’s almost as if an economic polar vortex has spread across Canada.
The number that made markets gasp came earlier this month when the Canadian monthly unemployment report came out, showing a drop of 46,000 jobs. Since the country has one-tenth the population of the U.S., that’s like us getting a non-farm payrolls report of -460,000. Earlier in the month we got data showing that Canada posted a trade deficit in November – way below expectations. Its latest purchasing manufacturer index for December was also much weaker than expected.
It made for a greatly anticipated Bank of Canada meeting this week, with relatively new Governor Stephen Poloz. On Wednesday the bank kept its base interest rate steady at 1%, but left the door open to lower that rate if the economic situation weakens.
Much of the market punishment for the poor data was heaped on the Canadian dollar, which is at its weakest since July of 2009, and currently holds the lead as the worst performing currency against the U.S. dollar this year. Of course, for a country looking to regain its footing in international trade, this is good news. In fact the currency was one of the focus points for the Bank of Canada, as Governor Poloz in his post-meeting press conference indicated that the currency is still too strong – i.e. the Bank of Canada is happy to see it fall further.
So why did this happen? It all comes down to energy, and the good news we have experienced with domestic demand in the U.S. translates into bad news for Canada. In addition, China’s recent slowdown has put the brakes on its importing of oil from Canada. Meanwhile, Canada’s domestic consumers seem to have pared back spending as they are running record household debt. The combination seems like an economic version of the polar vortex that is currently bringing bitter cold to parts of the U.S.
My view: There are both structural and cyclical aspects to the problems Canada is facing. The U.S. energy boom will continue, to Canada’s detriment, but the continued weakness in Canadian currency should help it weather the current economic storm a bit better.
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