Canada is in for a rude economic shock

Recent employment numbers show the US is doing quite well. Preliminary Bureau of Labour Statistics numbers show 252,000 jobs were added in December.

The unemployment rate in the US has fallen to 5.6% and the stimulus provided by lower gasoline prices is expected to continue propelling the country forward in its economic renaissance. Indeed, in 2014 the US saw its total employment reach the highest level since 2007.

Meanwhile, Canada exhibited a much weaker performance, with Statistics Canada reporting that Canada lost 4,300 jobs in December and had an unemployment rate of 6.6%. This follows the loss of 10,700 jobs in November and suggests a reversal in economic fortunes is underway. The former northern tiger seems to have been declawed, as the American eagle takes to the skies again.

This reversal in performance should not come as a surprise, given the forces driving both economies in the wake of the 2009 recession. Even though there were employment losses in central Canada’s manufacturing sector, the country managed to ride out the recession relatively well because high commodity prices generated a resource boom in the West. Canada was so insulated that its housing sector has continued to see price gains and its burden of consumer debt and housing prices now resemble those of the US prior to the 2009 recession.

Canada’s much touted superior economic and fiscal performance relative to the other G-7 countries can be attributed to the traditionally stronger Canadian banking sector, a strong fiscal position brought about by the deficit reduction of the 1990s and the presence of natural resource producing provinces. This good fortune bred a degree of complacency that resulted in Canada resting on its laurels. The sudden drop in oil prices has provided a rude awakening.

The US was hit much harder by the 2009 recession. In 2008 and 2009 total employment fell 2.6% and 3.8% respectively while in Canada grew by 1.7% in 2008 but fell 1.6% the year following. The US has come back because its remains one of the most dynamic and innovative economies in the world, with a large dense internal consumer market and nimble firms – relative to Canada.

The shock of the 2009 recession prompted its private sector to restructure and innovate and the result has been recovery and employment growth – even in manufacturing. Moreover, the US is generating its own energy boom through the exploitation of shale oil. One of the dividends of this activity is the current drop in oil prices from the increased supply on world markets. The added impetus of much cheaper energy will provide the stimulus to further drive its economic recovery.

The recovery of the American economy has been taking shape since 2009. Indeed, US employment growth has actually outperformed Canada for several years. From 2010 to 2013, average annual total employment growth in Canada was 1.3% compared to 1.5% in the US. Indeed, over these four years, Canada’s employment growth rate only exceeded that of the US in 2010.

Moreover, the US appears to have overcome its manufacturing malaise and is actually creating jobs in the sector. During the 2010 to 2013 period, the average annual growth rate of manufacturing employment in Canada was -0.7% compared to 1.2% in the US. In 2013 alone, manufacturing employment in Canada shrank by 2.9% while in the US grew by almost 1%. In motor vehicle production – the mainstay of Ontario manufacturing – 2013 saw employment grow 5.3% in the US and only 1.9% in Canada.

Although wage growth is not marching in tandem with the employment gains and economic inequality is still an issue, the US has used the last four years to restructure its economy. Its vast market and human capital resources, coupled with the new world of low energy costs, have placed it on the path to sustained economic growth.

Canada on the other hand, has not used the last four years as productively and is now banking on a lower-value loonie and an American economic recovery to fuel its exports. Canada may be in for a rude shock as it discovers its firms cannot compete with restructured and more efficient US firms.

This article is distributed by Troy Media in Calgary. Visit www.troymedia.com.