Strong US recovery best for ailing Canadian economy

Analysts say a 4% bounce-back in the US in Q2 is much better than expected.

The US rebound, suggests the American economy is set for a strong second half.

The US rebound, suggests the American economy is set for a strong second half.

OTTAWA — A strong economic performance by the US for the year’s second quarter is fuelling hopes Canada’s economy may too be poised to shift into a higher gear.

Analysts say the 4% bounce-back in the US during the quarter – which included an 11.7% spike in imports – was much better than expected and the type of news the Bank of Canada has been anticipating.

The economist consensus is for a pick-up of 0.3% during April, which would be considered moderately encouraging, but Bank of Montreal senior economist Sal Guatieri said the odds have risen for an even bigger month and a stronger quarter overall when the Statistics Canada’s June numbers arrive.

“It’s possible, in light of the stronger US report, that we may see an upside surprise,” he said, noting that the agency had previously reported robust manufacturing and wholesale sales for the month. “Canada will definitely benefit from a stronger US economy.”

In another positive for exporters, the loonie slipped about one-third of a cent to dip below 92 cents US, which should make Canadian exports more competitive in foreign markets.

While the stellar numbers south of the border – including an improvement in the labour picture – could result in the US winning bragging rights from its northern neighbour, policy-makers in Canada are unlikely to complain.

“It’s fundamental to our growth story,” said James Marple, an economist with TD Bank. “So far, the Canadian economy has outperformed the US but that’s been largely due to domestic demand fuelled by household debt and a housing market rising above fundamentals.

“But to maintain even the growth rate we’ve had we’re going to need to transition to exports as a driver of the economy,” he stressed.

The Canadian economy has been stuck in neutral for the better part of three years, with growth rates at or slightly below 2%. Meanwhile, after a strong job creation record following the 2008-09 recession, the past 12 months has seen employment growth level off to under 1%.

Bank governor Stephen Poloz has been hoping for a rebound in external conditions, particularly in the US, to begin what is referred to as a “virtuous cycle” in the Canadian economy where demand for exports boosts business confidence which, in turn, triggers expanded business investment.

Earlier in the month, Poloz complained about the “serial disappointment” of the global economy as a key restraint on Canadian growth.

The US rebound, following a first quarter when the economy actually shrank by 2.1% –mostly due to severe winter weather – suggests the American economy is set for a strong second half with GDP advancing at about 3% or higher.

Poloz has said that due to the loss of capacity caused by the 2008-09 recession, Canada won’t likely benefit to the extent it might have in the past. But he said any improvement in the US will increase demand for such things as Canadian autos and parts, forest products and other manufactured goods, as well as oil.

There were elements of caution in the second quarter report, including a strong build-up in inventory, which could dampen expansion down the road.

Marple noted another worry: the recent downturn in the US housing market which is an important indicator for Canadian exporters since much of what they ship south – including appliances, furniture and wood products – is dependent on the sector.

But most analysts see signs that the current pace of the US expansion, after evening out the bumps of the first and second quarter, is sustainable at least for the short term, which would allow the Federal Reserve to start raising interest rates in 2015.

That gives room for the Bank of Canada, in tandem with the Fed or closely before or after, to also begin the process of moving rates to more normal levels from the historic lows of the past five years.

© 2014 The Canadian Press

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