Two closely linked economies but two very different recoveries: that’s what you get when you compare Canada’s performance with that of the U.S. over the past few years.
According to Douglas Porter, chief economist at BMO Capital Markets, the most notable difference between the US and Canada is the widely diverging performance of the two job markets since the financial crisis erupted seven years ago.
In the 2007-to-2011 period, Canada fared a lot better than the U.S. when it came to job growth. However since 2013, it’s the U.S. that has churned out better numbers. To understand the difference, it helps to look back at the years since the recession began. Canadian government country reacted quickly to the recession with massive stimulus programs to support employment. By contrast, the U.S. state and local governments had to run highly austere policies that weakened the recovery south of the border.
Fiscal policy wasn’t the only difference. The housing market in this country was hit much less hard than in the U.S. and rebounded faster from the recession. The banking sector was in much better shape on this side of the border, maintaining its level of mortgage lending while borrowers responded enthusiastically to rock-bottom interest rates.
In the U.S., by comparison, housing took the brunt of the recession’s blow, falling steadily through the 2007-to-2011 period amid tight lending conditions that kept buyers away. Canadian auto sales returned to normal soon after the recession ended whereas U.S. auto sales are only now returning to pre-recession levels.
Taken together, the housing, consumer spending and government sectors tend to be rich in jobs and light on productivity. So when they started to improve, employment spiked up in all three. Today, the picture looks a little different as Canada now lags the job creation pace of the U.S. One reason is that this country has come to rely much more on exports to fuel its recovery.
The export sector is often tied to investments in equipment and manufacturing, which tend to improve productivity and lower job creation. So, while we’ve had respectable economic growth, the job numbers lately have been disappointing.
The result has been solid employment gains without particularly strong growth in GDP so far. The best for the U.S. could be yet to come as it catches up. The U.S. will be playing catch-up on economic growth for a while and should see much firmer employment and probably better GDP growth.
The Federal Reserve is likely to begin raising U.S. interest rates next year, at least three months before Canada does. That should lead to a stronger U.S. dollar and softer Canadian dollar.
As for stocks, improving productivity and earnings, combined with a delay in Bank of Canada tightening, should help the TSX holds its ground. But the recent run of outperformance will be hard to sustain if the U.S. economy outpaces Canada’s.
Once again the two economies are likely to follow different tracks as the recovery unfolds.
Source: Montreal Gazette