Moviefone Copyright 2011, HuffingtonPost.com, Inc. Moviefone Good old fashioned elbow grease.
A decade ago, predictions that the Canadian currency would rise to 75 cents US seemed outlandish. Some firmly believed that we were headed for 50 cents, and that fixing the rate in the mid-60s would be a good deal. No one foresaw the 8 to 9 per cent annual appreciations that blew past the 'wackiest' forecasts and for a time took the loonie well north of parity. After that run, few were expecting stability.

Not long ago, even fewer were expecting a drop in the dollar. After all, high commodity prices were only expected to rise more if and when the world economy ever recovered. Faster growth would also lead our interest rates north -- and perhaps more rapidly than in the US. Many expected an ailing greenback to boost the loon, as 'flight to quality' plays ebbed. And then there's Canada's halo effect: our great financial, fiscal and natural resource conditions, with their magnetic pull on foreign capital.
Things haven't quite worked out that way. A reviving world economy has revealed that we are not running out of resources at the pace many feared; in fact, in certain prominent cases like US shale oil and gas, resources are far more abundant than many dreamed. This has quieted speculative activity and brought prices down. Copper, the prescient metal, is down 17 per cent from its peak, and with it a lot of other base metals. Fuel prices have weakened considerably: oil has now been below the triple-digit zone for a year, and is 33 per cent below its peak. Food and forestry prices are bucking the trend, but all told, the weakness is weighing on our commodity-influenced currency.

In addition, interest rates may not boost the loonie much after all. Sure, Canada faces tight constraints going into the next growth cycle, but high consumer debt, a faltering housing market and public sector cutbacks will likely counter the need for rapid monetary tightening. Moreover, US rates are currently 88 basis points lower than ours, and have further to go to get to normal levels over the medium term -- additional rationale for a softer Canadian dollar in the medium term.

And what of those who foresee a perpetually weak US dollar? Guess again. With some of the strongest economic fundamentals in the OECD, don't count the US out as a global growth engine with a sought-after currency. In fact, the greenback has been on the positive side of currency wars that don't seem likely to abate anytime soon. With exports being the great hope of OECD economies saddled with weak domestic fundamentals, tolerance for appreciating currencies is low. Slow appreciation is a very likely outcome for the greenback, which will further weigh on the loonie.

Finally, there's the halo effect -- which has lost some shine in recent days. High-profile laments of Canada's domestic weakness are causing international investors to pause and reflect, in spite of the promise of significant resource investment. Near-term challenges on the home front will likely continue to temper enthusiasm for the loonie, causing it to drift closer to its fundamental value.

The bottom line? The Canadian dollar's recent downward drift makes sense. From our forecast of US 97 cents this year and 96 cents next, it looks like its medium-term home will be at the mid- to high- 90-cent level - possibly lower. It's just in time for a 'growth handoff' to Canadian exporters!]]> Thu, 23 May 2013 17:35:10 EDT 3326975
International trade will be a key growth driver for the Canadian economy this year and next. However, the distribution of export growth in Canada's provinces is anything but even. Some are leading the charge, while others are steady at the national pace. Others are lagging behind, some quite seriously. What are the key factors influencing the different growth patterns?

On top of the heap are British Columbia and Nova Scotia. Surging forestry exports are a big reason that B.C. will see 12 per cent growth this year and a further 11 per cent in 2014. Wood shipments to the reviving US market will add to the robust increase in exports to China. BC will also get a solid boost from mineral exports, thanks to new mining production. Nova Scotia will see the same growth rates, except the years are flipped around. It's largely an energy story for Nova Scotia, with Venture and Deep Panuke causing output to double this year and double again in 2014. The return of NewPage supercalendered paper production will boost forestry exports by 15 per cent in 2013.

Next in the rankings is Newfoundland and Labrador. Expanded iron ore capacity is behind back-to-back 20 per cent increases in exports of industrial goods. Energy exports will recover this year from a maintenance-related drop last year, rising 13 per cent. Growth will slow sharply to just 2 per cent in 2014. However, gains in the province's less-dominant sector will be enough to raise exports by 11 per cent this year and 6 per cent in 2014.

Manitoba is just a hair behind. A diversified export base will capitalize on the US rebound, rising 12 per cent this year. All industry sectors will see growth at or close to double-digits. Things are not as good next year, with the influential agri-food and industrial goods sectors slowing to a crawl.

In the middle of the pack is Alberta. The forecast is dominated by the outlook for energy exports, which make up almost three-quarters of total provincial shipments. Transportation capacity remains an issue, weighing on both price and volumes. The middle ground is shared with Quebec. Back-to-back double-digit gains in aerospace exports are an obvious growth driver, reflecting strong demand for commercial aircraft and the start of C-series production. However, don't cut out the solid activity in machinery and equipment, agri-food and forestry exports. Ontario is mid-pack this year, in spite of relatively weak auto sector shipments, but softness will weigh more heavily on growth in 2014. Machinery and equipment exports are the exception, with back-to-back 8 per cent gains.

Saskatchewan will see the largest tumble in growth in 2014. A sharp drop in potash shipments will hold overall exports flat in 2014, after a decent 8 per cent gain this year. New Brunswick is also one of the weak ones. Closure of the Brunswick Mine pulls New Brunswick to the bottom of the rankings this year, while flat energy exports hold the provincial growth rate back in 2014.

For the provinces, this disparate growth is more of the same. Last year, the top province grew 15 per cent, while the bottom province shrank by almost as much. In the mix, there were five provinces with outright declines in exports, while the other five grew. As always, growth rates were subject to large fluctuations in particular industries. Economic circumstances dictate that for the time being, that'll probably be the best we can expect, until true recovery sets in.

The bottom line? The provincial trade story is choppy - but lately, that's nothing new. That makes forecasting tricky at best, subject as it is to unexpected shifts in activity. But we expect as US growth revives, a good chunk of the volatility will fade, making things somewhat more predictable.]]> Thu, 16 May 2013 17:35:42 EDT 3281267
Jitters about the economy's near-term future shroud the planet. Confidence indicators for the largest economies are stuck in deep mud, stoking fears of a self-fulfilling slump. The latest data aren't helping. But quietly, amid the gloom, there's a different story. Lending activity is beginning to improve. Bond market spreads, even in precarious markets, are narrowing. There's even evidence of 'fright fatigue' -- a sign of confidence that the periodic crashes have been well-managed. And perhaps quietest of all, time has brought healing. Pent-up demand is now showing up in key indicators.

In pole position is the U.S. economy, where multiple indicators show that the economy is ready to race. Housing -- the harbinger market -- has rebalanced, re-igniting dormant residential construction. Given this market's broad linkages to the rest of the economy, that's great news. Consumer spending is vibrant again, this time without diving into debt. Already in comeback mode, business investment has only just begun, given corporations' $6 trillion cash stash. Hot private sector growth is being masked by government cutbacks, which are holding overall growth to 2.3 per cent this year. Next year's 3.3 per cent gain better represents the groundswell of growth that today is well underway.

Key emerging markets were tossed about by last year's extended pit-stop. However, most now seem to be on the mend, as a combination of US growth and fresh policy measures kicks up growth. China is forecast to rise from 7.8 per cent growth last year to 8.2 per cent this year and 8.5 per cent in 2014. Likewise, India will trade in last year's 4.5 per cent rise for accelerating growth above 6 per cent this year and next. Brazil will rebound to normal growth following last year's 1 per cent fright. Russia is in for a mild one-year dip in 2013, while Mexico will make it three years at 3.8 per cent growth.

Further back in the pack are the remaining large players. Europe is accelerating, but slowly. Large public spending cuts will keep the Euro Area flat this year. Austerity will take less of a bite in 2014, lifting growth to 1.2 per cent. Japan has gained some psychological lift from new, aggressive policies; nonetheless, growth is forecast to slip to 1.4 per cent this year and 0.9 per cent in 2014.

Canadian growth will soon require some fancy gear-changing. Debt-laden consumers, overbuilt housing markets and public-sector restraint are already weighing on domestic growth. It's up to trade to shore up the bottom line, and it won't disappoint. Exports will leave last year's modest growth in the dust, rising 8 per cent this year and an additional 5 per cent in 2014. Most industry sectors will see big gains this year, and the forestry, machinery and equipment and aerospace sectors will power exports ahead in 2014. Weakness in key commodity prices will dampen overall performance next year.

The bottom line? Shaking off the memories of recent growth crashes -- some as spectacular as they get -- will be tough. But as the race begins and the adrenaline kicks in, economies may even surprise themselves with their speed. It all adds up in EDC's Spring 2013 Global Export Forecast to world growth of 3.6 per cent this year, and 4.2 per cent in 2014. It looks like this time, the race is on.]]> Thu, 25 Apr 2013 17:07:21 EDT 3155293
Gauging sentiment is complicated by its very dynamic. Pessimism has three s's for a reason: first, pessimism sells. Gloomy headlines are far more likely to be read than upbeat ones. Proliferation of hi-tech communication media has only fed this appetite. Second, pessimism spreads. Remember, gossip is only good when it's juicy. But pessimism's most sinister quality is its tendency to be self-fulfilling. And the longer pessimism lingers, the more it seems to condition our behaviour.

Multiple indicators point to the persistence of current pessimism. Europe initially recovered from its depressionary funk in 2009, but has since tumbled back decidedly into a recessionary zone - thanks to GDP's current doldrums. Japan's mood has been below the line since the crisis, even though the pre-crisis period wasn't overwhelmingly positive. U.S. consumer confidence never really did recover. Oh, it didn't stay is the 2009 abyss, but three subsequent attempts to break out of recessionary gloom have failed -- very unusual for this typically 'glass-half-full' set. What is worse, U.S. confidence is now more volatile than at other points in the crisis, in spite of a recent bevy of upbeat indicators.

Are there any signs that might indicate a turnaround? Look to financial markets. Following the ECB's 'whatever-it-takes' announcement last fall, Euro area bond spreads have steadily narrowed, with the exception of Portugal alone. Nominal bond rates have also narrowed over this time, further suggesting greater calm in financial markets over near-term prospects. Big jolts to the system could change this, but so far, so good, in spite of the Italian election and the Cyprus issue.

Bank lending is also showing signs of easing. Commercial and industrial lending is on a tear stateside, and mortgage lending is convincingly on the rise. A mid-2012 lending relapse in Europe seems to be on the mend, although tilted more toward short-term lending. Signs of stabilization are evident in large emerging markets, while care is being taken not to re-stoke inflation. On the whole, though, it's a sign that borrowers and lenders are getting somewhat more adventurous.

Another related feature seems to be taking hold. Following wave after wave of bad news, there is some evidence of 'fright fatigue'. Whether a financial or fiscal jolt, or even a punishing natural disaster, success at managing the plethora of post-crisis events has created an underlying confidence that policymakers are generally getting it right -- a feeling that may well support a sustained rise in risk-taking, which itself can be self-fulfilling -- this time, in a very positive sense.

In addition, one further observation: it's never fair to conclude that pessimism has the better of us until the economy has dealt with boom-time excesses. Evidence points to a five-year period of excess, which the last four years have largely sopped up. If so, it remains to be seen whether natural forces are now going to work, increasing demand in a way that will finally restore confidence.

The bottom line? Persistence alone is not a good enough reason to conclude that confidence is gone for good. It may take some convincing, but our suppressed spirits may well be lifting, to great effect.]]> Fri, 5 Apr 2013 09:49:42 EDT 3015442
America's corporate cash-stash has been the most obvious. Hovering at US $4 trillion from 2006-08, cash and near-cash balances in financial and non-financial institutions ballooned to US $6 trillion in the following three years, and remain at that level now. That's a lot of growth, but is it really a mountain? Actually, it adds up to a whopping 38 per cent of US GDP, and the change in the past four years on its own is almost 9 per cent of GDP. Clearly it wouldn't take much of this to make a dramatic mark on near-term GDP growth. Can we expect the floodgates to open anytime soon?

Post-crisis, corporations decided to sit on their cash for a number of reasons. First, growth prospects were thin, so cash conservation seemed prudent. Crisis itself was likely another motivator - better to have cash on hand for contingencies or adverse developments. Third, for their part, financial institutions were hardly in a lending mood, preferring, and in not a few cases, required to build up their capital bases. Market psychology is perhaps a more recent motivator. Multiple frustrated attempts to restart growth has likely created a "you first" investment mentality that has few takers.

But these factors are more speculative elements of business investment. A more tangible signal is actual capacity. Businesses invest when they need to. As orders rise, production capacity in a low-investment environment gets soaked up - sometimes pretty quickly. Nightly news would convince most that the US is a long way from full capacity. Guess again. A huge capacity chasm opened up in 2009, but production growth since then has bridged about 90 per cent of that gap. The good news? It has already spurred US investment spending, both on equipment and more recently on buildings.

Will investment growth continue? Money doesn't seem to be an issue. And while outlays for plant and equipment have risen, they're not keeping pace with demand. Through late 2012, capacity utilization continued to climb, a signal to corporations that investment actually needs to intensify. That's great news for an economy that is already seeing glowing stats from the housing and consumer sectors.

Are other economies doing the same? The corporate cash stash has grown around the world, but in the largest economies, the capacity story is different from America's. In the EU, capacity utilization initially recovered more quickly, but has since sunk to uninspiring levels and is currently directionless - hardly a prescription for imminent investment growth. Japan's story is much the same.

Thankfully, capacity utilization in Canada is more like the US pattern, although the gap has not closed as quickly. This suggests that the corporations north of the border may not be as quick to dip in to the nest-egg. That said, investment is one of the more responsive indicators, and should a US investment spending frenzy occur, Canada - and other parts of the world - could quickly join in.

The bottom line? Evidence shows that an acceleration of US business investment is in the works. Given cash-bloated balance sheets, much more is possible - with positive effects here and abroad.]]> Thu, 28 Mar 2013 16:29:47 EDT 2965778
Their recent performance suggests we should pay attention. Copper prices soared in 2006, presaging the global economy's multi-year growth frenzy at the tail end of the protracted expansion. Copper wasn't caught off-guard by this excessive growth, successfully predicting the coming recession in a colossal 66 percent price plunge that began in mid-2008. Again ahead of the curve, copper foresaw the boost from global stimulus in an early-2009 price revival. Many economists were green with envy.

Since then, the record has been checkered. A copper price rally in the latter half of 2010 accurately predicted growing global momentum, which fizzled thanks to 2011's strange sequence of natural disasters. OK, it's hard for any pundit to predict acts of God. But it seems in the aftermath that copper lost its nerve. Although the economy and other leading indicators have since shown positive movement, copper has been range-bound at the $3.60/lb level since mid-2011. However, in recent weeks, the price has tumbled 6 per cent. Should we worry?

Copper inventories offer a clue. Close to all-time lows from 2004-08, inventories led to extraordinary pre-recession price spikes and spurred speculation that we were running out of the stuff. Inventories almost tripled as recession hit, assuaging those fears, but doing little to keep prices at bay. Only as inventories headed back to more normal levels in mid-2011 did prices begin to stabilize. But since January, inventories skyrocketed to levels last seen in early 2010. Does this spell trouble?

Not according to other leading indicators. Barometers of the U.S. economy -- like housing, orders and the stock market -- are pointing up. Certain key emerging market signals are brightening. Glimmers of hope are even evident in Europe. So this time around, who is right?

A key threat to copper's stellar record is the unusual deluge of liquidity in the market at present. Since the crisis, successive rounds of interest rate cuts supplemented by ground-breaking quantitative easing programs have injected cash into the system that for the most part has not found its way into normal lending and investing activity. As such, it has been parked in various places in the market, one vehicle being commodities. If copper prices are indeed being distorted by this unprecedented activity, then it is quite likely that it has been thrown off its forecasting game -- at least temporarily.

Since quantitative easing has thrust economic and financial markets into uncharted waters, plotting the unwinding of these extraordinary measures is not trivial. If indeed the extra liquidity has distorted certain variables, among them copper prices, then withdrawal of the liquidity is likely to reverse the process. At the limit, this suggests that the coming global recovery could be the first where commodity prices -- and with them, the prescient copper price - actually decline. Copper's recent downturn could actually signal the start of this process.

The bottom line? Copper prices are down, but it is far too soon to panic. This time around, the price drop may actually hail recovery. For the moment, it is best to take into account the movements in other leading indicators, while keeping a close eye on this one.]]> Thu, 21 Mar 2013 10:13:52 EDT 2916667
GDP growth for Singapore certainly reflected last year's wobble. Output posted a shocking 6.3 per cent drop in the third quarter of 2012, a nasty tumble rivaled only by performance at the onset of the economic and financial crisis. The subsequent GDP figure was a relief, but at 1.8 per cent growth, it was hardly an offset to the third-quarter crunch. Production of services boosted quarterly growth, while construction decelerated and manufacturing shrunk for a second successive quarter.

What are more recent data saying? Singapore's leading indicator foretold the economy's sorry third quarter, falling 2 per cent in the April-June period. But since then, it has seen back-to-back increases of 0.7 per cent, pointing to growth beyond the fourth quarter's mini-rebound. Business expectations seem to agree -- the sub-index for the important transportation and storage sector jumped in the fourth quarter of last year into positive territory for the first time since mid-2011. The financial services sub-index was in positive territory for a second successive quarter after a similar drought.

Buyers seem a bit more tentative. Singapore's Purchasing Managers Index is still hovering in the neutral zone between growth and decay. However, in January the forward-looking new orders component moved above 50, indicating growth, and stayed there in February. What's a lot more encouraging are the results of the electronics sector alone. This sub-index surged in January and February to the highest level since October, 2011, powered by a leap in new orders and new exports. Production is responding, and the backlog of orders now seems supportive of continued gains.

Shipping activity -- a critical sign of regional conditions -- is also gaining steam. Container traffic, battered by uncertain conditions in the middle months of the past two years, rose respectably in December and January. It's too early to declare victory, but the positive movements are encouraging. Vessel arrivals are up, thanks to container and freighter traffic. Coaster and bulk traffic is also up, an early-stage sign of a pickup in regional production activity. Tonnage numbers also seem to indicate that the average size of container ships has risen over the past several months.

These increases are plainly seen in Singapore's export numbers. January figures for non-oil exports interrupted a worrisome down-trend with gusto, surging by a spectacular 11.5 per cent on a monthly basis. Although one month does not a trend make, this key movement is an early sign that the weakness that characterized last year's figures may indeed be giving way to brighter regional performance. These figures are not alone - early signs of positive movements are popping up across the region, suggesting that the strengthening of the US economy -- also evident in Singapore's trade numbers -- is boosting the fortunes of international trade in East and Southeast Asia.

The bottom line? It may be too soon to conclude that a revival of Asian trade is in the works -- but late-breaking data seem to demonstrate that Asia is shrugging off the temporary weakening in the middle of last year. It will pay to keep a close eye on these key data in the coming days and weeks.]]> Thu, 14 Mar 2013 11:47:40 EDT 2866741
Commodity prices have scored high on the economic shock-talk scale in the past decade. Although prices are generally still riding high, the recent trend has been downward. Energy, base metal and even food prices are down considerably from recent peak levels. We expect the trend to continue with the U.S. recovery spreading overseas, as liquidity shifts from parked investments to plant and equipment -- but are all commodities following the same pattern of decline?

There is one noticeable anomaly. Lumber prices are soaring, thanks to the surge in new home building in the U.S. -- up a stunning 40 per cent over the past year. In contrast to the declines in other sectors, and in spite of weak pulp and paper prices, the forestry index is up 22 per cent over year-ago levels. Composite USD prices have been rising steadily since last fall, and are now up 43 per cent since February 2012 to $415 per thousand board-feet, led by gains in the price of Western SPF 2X4s.

Panel prices are similarly striking. Plywood prices are up between 20 and 30 per cent, depending on the source. But the real drama has been reserved for oriented strand board (OSB). Long in the doldrums, OSB prices have rocketed ahead, more than doubling in the past 12 months to USD 415 per thousand square feet, and gaining momentum in the past month. Is it a bubble, or will it last?

Consider demand. Although globally, construction of housing has generally softened, the U.S. market is showing no signs of a relapse. Even with recent growth, U.S. housing starts are well below the rate of household formation, and unlike the past six years, the balance between supply and demand is roughly even. Starts could rise another 40-50 per cent without upsetting this balance. House prices are responding, rising across the lower-48 and prodding renters to jump in before they get left behind.

How about supply? The protracted U.S. housing crisis lowered Canadian sawmill capacity significantly -- Canadian lumber shipments to the US are just 40 per cent of 2004 levels. A large share of that is gone for good. Moreover, we're shipping lots more to China. Higher product prices will create lots of incentive to build new capacity or expand existing facilities. Yet the International Wood Markets Group reports limited capacity to expand wood production significantly in the key North American production zones. High prices may indeed attract higher imports from Europe and elsewhere.

Demand and supply conditions suggest no imminent price relief, and some believe that a price super-cycle is in the works. Canadian wood shipments have already begun to rise, with annual exports up 21 per cent in 2012 and growing. But in this cycle, the U.S. will have to compete with fast-growing East Asian markets, which have been a welcome refuge for beleaguered Canadian producers in the past decade. Average annual growth of wood exports is 39 per cent for China, 9 per cent for South Korea, and 6.3 per cent for the Philippines. Turkey is also a hot current destination for wood products.

This news is welcome relief for those in Canada's wood products industry that are still standing. As U.S. growth spills over to the rest of the world, demand for wood products will only increase. As such, it is hard to believe that the industry is not on the verge of a new period of expansion.

The bottom line? Sustained growth in the U.S. housing market is breathing life into one of the industries hardest hit by the global economic and financial crisis. Perhaps this is where the new wave of international business investment will begin. One thing's sure, there's ample money to fund it.]]> Wed, 6 Mar 2013 17:18:05 EST 2813117
Exports still haven't fully recovered. Although post-crisis growth in merchandise exports has on the whole been remarkable, modest 1.9 below the 2008 peak. The main reason? Exports to the US, which remain 10% below the previous peak. At the outset of 2012, exports were expected to have a much better year. They entered 2012 with a lot of momentum, but that fizzled mid-year as global pessimism weighed on sales, and never really regained their verve.

The shift to emerging markets continues. Collectively, Canadian merchandise exports to non-OECD countries grew 4.6% in 2012, outpacing the 1.5% of OECD exports, and lifting the non-OECD share to 11.5%. Diversification of trade to non-traditional markets is still alive and well, and is expected to remain a critical feature of the Canadian trade space well into the future.

China is now the number 2 destination for Canadian goods. That's the spot the UK has occupied for the past 5 years, but China bumped them out of the spot, likely for good, with 16% growth last year. China didn't see an unusual surge; it merely continued the trend. That's not to say that export growth to the UK has been shabby; unlike exports to other OECD countries, shipments to the UK have averaged 16% growth over the past decade. But exports to Britain blinked in 2012, falling 1.6%.

Things were not rosy in all emerging markets. Troubles in the Brazilian and Indian economies during the year translated into atypical double-digit drops in Canadian exports. Hong Kong and Taiwan saw similar declines, but the 27% drop in exports to South Korea -- Canada's seventh-largest merchandise export destination -- was the steepest decline of the bunch. While shocking, these declines are not expected to persist.

Primary product sales were outgunned by high-end goods. Collectively, exports of primary goods and primary manufactures slid 2.4% during 2012, weighed down by oil and gas, metals and pulp shipments. In contrast, high-end exports rose 14%, thanks to vibrant auto- and aerospace sales.

Consistent, solid export growth generally came from emerging markets. China topped the charts on this measure, but Colombia, ranked 25th in value of goods shipped, was actually number 2 in strength and consistency. Australia, the highest-ranked OECD country on this score, wasn't far behind Colombia. Mexico and the US were next on the list, with very similar scores.

Imports have recovered. In fact, that was last year's news, but buoyant Canadians again powered imports ahead, now 6.4% above the 2008 peak. Aided by a strong loonie and cross-border shopping, imports from the US edged above their 2008 peak for the first time. Growth in imports was strongest from Japan and Germany, while France and the UK sustained large losses.

The bottom line? On the trade front, by and large 2012 was a forgettable year. Things look brighter for 2013. US private sector growth is surprisingly strong, and emerging market sales will revive. Sales volumes should do well, although weaker prices will take some shine off the overall numbers.]]> Fri, 1 Mar 2013 17:28:04 EST 2782194
A decade ago, predictions that the Canadian currency would rise to 75 cents U.S. seemed outlandish. Some firmly believed that we were headed for 50 cents, and that fixing the rate in the mid-60s would be a good deal. No one foresaw the 8-9 per cent annual appreciations that blew past the "wackiest" forecasts and for a time took the loonie well north of parity. After that run, few were expecting stability.

Not long ago, even fewer were expecting a drop in the dollar. After all, high commodity prices were only expected to rise more if and when the world economy ever recovered. Faster growth would also lead our interest rates north -- and perhaps more rapidly than in the US. Many expected an ailing greenback to boost the loon, as "flight to quality" plays ebbed. And then there's Canada's halo effect: our great financial, fiscal and natural resource conditions, with their magnetic pull on foreign capital.

Things haven't quite worked out that way. The bumbling world economy has revealed that we are not running out of resources at the pace many feared, quieting speculative activity and bringing prices down. Copper, the prescient metal, is down 17 per cent from its peak, and with it a lot of other base metals. Significant new oil discoveries have taken the heat out of fuel prices. Oil has now been below the triple-digit zone for nine months, and is 30 per cent below its peak. Food and forestry prices are bucking the trend, but all told, the weakness is weighing on our commodity-influenced currency.

In addition, interest rates may not boost the loonie much after all. Sure, Canada faces tight constraints going into the next growth cycle, but high consumer debt, a faltering housing market and public sector cutbacks will likely counter the need for rapid monetary tightening. Moreover, U.S. rates are currently 88 basis points lower than ours, and have further to go to get to normal levels over the medium term -- additional rationale for a softer Canadian dollar in the medium term.

And what of those who foresee a perpetually weak U.S. dollar? Guess again. With some of the strongest economic fundamentals in the OECD, don't count the US out. In fact, the greenback has been on the positive side of currency wars that don't seem likely to abate anytime soon. With exports being the great hope of OECD economies with weak domestic fundamentals, tolerance for appreciating currencies is low. Slow appreciation is a very likely outcome for the greenback, which will further weigh on the loonie.

Finally, there's the halo effect -- which has lost some shine in recent days. High-profile laments of Canada's domestic weakness are causing international investors to pause and reflect. Near-term challenges on the home front will likely continue to temper recent enthusiasm for the loonie, causing it to drift closer to its fundamental value.

The bottom line? The Canadian dollar's recent downward drift makes sense. It looks like its medium-term home will be at the mid- to high- 90-cent level -- possibly lower. It's just in time for a 'growth handoff' to Canadian exporters!

]]> Thu, 21 Feb 2013 11:33:55 EST 2727054
US and Canadian housing markets are being hit by big shifts that look like the best of times and the worst of times. As of December, US housing starts are just shy of the million mark, up 37 per cent over December, 2011. In contrast, Canada's January starts plunged 20 per cent compared with year-ago data, eking out just 161,000 units. Are we headed for recession while the US economy recovers?

Housing markets on either side of the border have been worlds apart over the past two decades. Housing demand and supply were roughly in balance stateside in 2001 after eight years of solid growth. Low interest rates spurred a buying frenzy, creating a massive, five-year bubble. The game was up in 2006, the beginning of a tortuous three-year collapse.

Four years of negligible construction ensued, enough to soak up the surplus, and US markets are again on the march. Prices are up, sales are up, and construction is making a beeline for more normal levels. Even with growth to date, there is still room for the US housing market to see 22 per cent growth in each of the next two years, as only then will starts match basic household formation. This is the best indication of a US economy that after years of languishing, is on the move.

Canada's jobless recovery in the 1990s translated into chronic underbuilding of houses for a large part of the decade. In 2002, Canadian homebuilding surged in tandem with the US market, but in our case, it was to bring markets back into balance. Recession brought building levels back to reality, but it was a much softer correction than in the lower 48 -- on a relative basis, Canadian building was three times the US level. Low interest rates returned Canadian homebuilding to the "excessive" zone, this time creating a bubble. January's tumble is an overdue correction to a more sustainable pace.

If Canada is indeed seeing a housing correction (it's still too early to tell), then does it portend gloom?

Normally it would, but this time seems different. Canada has a huge list of resource projects on the 10-year docket -- if only a fraction of these are realized, spending will have a huge impact on overall GDP. And then there's trade -- if the US economy is indeed recovering, Canadian exports can add the windfall to the increasingly significant, fast-growing trade we are doing with emerging markets. For a change, Canadian housing may not be the bellwether it used to be.

That's good news for Canadian exporters. Pummelled by the collapse of global trade in 2009, exporters looked to the domestic economy as a shelter, and were not disappointed. That source of growth is now getting thin, starting with housing -- but just as the world economy seems at long last to be recovering. Once again, it seems like it's time for exporters to increase their outward focus. It's beginning with the wood products sector, but will likely spread to other sectors quickly.

The bottom line? Signs of correction in Canada's housing market don't point to a home-made recession. Rather, it's a signal that the balance of growth is shifting back to trade and investment. Those who follow the new course of demand face the greatest opportunities in the coming cycle.

]]> Wed, 13 Feb 2013 17:55:12 EST 2678119
Things had been looking good. Third-quarter GDP growth was impressive, at 3.1%. Key indicators were looking good in the run-up to year-end. Forecasts were being revised upward, not the reverse. The trouble with a late-breaking U-turn in growth is that the impact is almost all on the next year. The fourth quarter of any year is always the one with the least contribution to that year's growth; odd as it may sound, three-quarters of the impact actually carries forward to the following year's GDP result -- unless, of course, there is a double-reverse in the following quarter that offsets this one. Is that likely?

The answer lies in the causes of fourth-quarter weakness. International trade was soft in the final three months of the year. Storm activity on the East Coast appeared to inhibit both imports and exports, although ongoing weakness in the OECD economies and the summer slowdown in China, India and Brazil are likely additional causes of the large dip in exports. A fast rebound is unlikely, given that, on balance, U.S. is still the growth leader -- that is, expect imports to outpace exports.

Government spending was a huge drag on the fourth-quarter numbers. Adjusted for inflation, government consumption and investment together fell 6.6%, enough to slice 1.3 percentage points from quarterly GDP growth. While these figures can be fickle, a fast turnaround is quite unlikely, given the expiration of special spending programs and the ongoing squabble in Washington over fiscal prudence. Austerity measures are expected to bleed 1.5-2 percentage points from GDP in 2013.

Not to be outdone, a sharp drop in inventories took as much away from fourth-quarter growth as the government sector. However, there's a big difference -- with storms temporarily arresting movements of goods and services, it's no wonder that purchases depleted inventories, and it's just as likely that those inventories are being replenished as we speak. A rebound could provide a welcome boost to first-quarter GDP -- but only if underlying demand is strong enough to prompt it. Is there a clear case?

That's where the fourth-quarter data get exciting. Powered by a 13.9% surge in durable goods, consumption turned in a very decent showing. This spending was no doubt related to an equally impressive 15.3% gain in residential investment -- yet another installment in long-awaited revival in the U.S. housing market. Quarterly data also show more than a glimmer of hope that U.S. corporations are beginning to part with a slice of their massive cash stash. Private investment in equipment ballooned by 12.5%, following three semesters of so-so growth. These three engines on their own contributed 2.6 percentage points to quarterly GDP growth in the final three months of last year. Small wonder an average of 210,000 private sector jobs were created in each of the past four months. Impressive!

The bottom line? As shocking as America's fourth quarter figures are, one key message rings through: underlying growth is where it's at. Know that the government and trade sectors will weigh down growth, making things look humdrum. But the rest of the U.S. economy is heating up, and that's where Canadian exporters do the bulk of our business. Prepare to harness this growth in 2013!]]> Wed, 13 Feb 2013 16:04:44 EST 2624271
Analysts have wondered aloud whether travel intensity -- the number of trips relative to GDP -- is actually on a down-trend. After all, technology allows doctors to operate remotely, and enables us to do far less complex work over the wire. It makes sense that we just don't need to be on location as much as before. However, that same technology has brought far more countries into the global economic picture, increasing aggregate air travel greatly over the past two decades.

U.S. air travel statistics tell the tale. Between the late 1980s and 2000, passenger air traffic rose 64 percent. It took a beating in the security-conscious post-9/11 period, but between 2003 and 2007, it soared 19 percent. It swooned again with the global financial and economic crisis, and has struggled to get back up to previous peak levels. Domestic travel has been weakest; international travel has actually recovered nicely, and thanks to robust Latin America travel, continues to scale new heights.

European data show the same trends, although the impacts of 9/11 and the global recession have not been as severe. Data on emerging market traffic are more sparse, but where available speak of the explosive growth in business activity in recent years. Taken together, recent trends give a decent picture of the industry. But can we learn anything from more recent movements in air traffic?

Data from the IATA show that revenue passenger kilometers in North America track the recent ups-and-downs of the economy. As of November, year-to-year passenger travel was up 2.6 percent after flat performance in the previous four months. European travel was a bit better, up 4 percent for the same period, but that was down from recent months, reflecting Europe's recessionary conditions. Compared with figures in the rest of the world, these stats are modest, reflecting a combination of one-off economic interruptions and key structural business impediments in OECD countries.

It comes as no surprise that emerging market data are much more impressive. Taking up the rear is Asia, up just 6.2 percent over last year's passenger traffic, likely weighed down by Japanese activity. Closer to home, Latin American flights are up an impressive 11 percent as of last November. At the same time, Middle East traffic was up 10.5 percent, but has consistently been the strongest global market in the post-recession period. In these vibrant markets, it is still best to book early.

Traffic is one thing, but fuller planes also indicate greater air-carrier efficiency. Load factors -- the ratio of passengers to available seats -- have risen consistently over the past decades. From just over 60 percent in the late 1980s, U.S. load factors have risen to 83 percent. International load factors are similar. Higher load factors and rising overall activity are a double dose of good news for air carriers.

The bottom line? If air traffic is any guide, economic activity seems to be picking up in the New Year. Get your cabin baggage in early, expect someone in the middle seat, and don't delay requesting the upgrade. But it's not just full planes -- expect full airports too -- and more so, as the year goes on.]]> Tue, 5 Feb 2013 14:22:03 EST 2574430
GDP statistics tell the tale. India's growth plunged from 8 per cent in mid-2011 to just under three per cent last summer. Brazil's long slide saw year-to-year increases tumble from 8 per cent in mid-2010 to less than half of one per cent in the second quarter of 2012. China's slowdown was less dramatic, sliding from nine per cent at the end of 2011 to 7.4 per cent by mid-2012 -- but given that China's economy experiences serious dislocation at around six per cent growth, its dip was too close for comfort. Thankfully, the worst seems to be over, and these economies are now on the mend.

At the same time, Mexico steadily generated quarterly growth in the 3.5-to-5 per cent range, with no discernable down-trend. True, the latest GDP figure is the weakest showing since the recession in 2009, but over the course of a year, growth fell by a mere one per cent, to a still-healthy 3.3 per cent. Among major emerging markets, only Russia showed similar resilience -- but in terms of net steadiness, Mexico still comes out on top. How do the numbers add up?

Delving into Mexico's national accounts is revealing. Consumers were surprisingly resilient in the post-recession period, but they are currently less enthusiastic; growth recently receded from the steady four per cent pace to just 2.2 per cent in the third quarter of 2012.

Private investment saw an even steeper decline. From an impressive 8-10 per cent pace, private construction registered a stunning 20 per cent year-on-year gain at the end of 2011 -- only to see growth completely vanish by the summer of 2012. Similarly, private sector machinery and equipment investment -- accustomed to hefty double-digit increases -- sunk to a year-on-year gain just shy of 4 per cent early last fall.

So far, the Mexican economy doesn't seem much different from the rest of the world. What is keeping its overall numbers afloat? Throughout 2012, the growing private investment void was filled in by a surge of public investment -- mostly construction projects. On paper it seems too good to be true, but the government's intervention couldn't have been better timed and the amounts could hardly have been better calibrated. In the history of fiscal timing, it's probably one for the record books.

But the story doesn't end there. Notwithstanding the very recent lull, rising private investment speaks to Mexico's ongoing success at attracting large amounts of foreign investment. Production arising from these investments is boosting Mexico's exports, which over the past two years have outpaced import growth, yielding a decent net contribution to the economy. That's something the other large emerging markets were not been able to say until very recently, and highlights the underlying strength of the US economy, the main driver of Mexico's export success.

Will Mexico's enviable record continue? The keen interest of foreign investors in Mexico suggests that the slowdown of private investment is temporary -- good news for the government, which can't afford to offset private investment indefinitely. More importantly, the export potential that justifies foreign investments is strong, thanks to resurgent US housing, consumer and corporate markets.

The bottom line? Mexico's recent growth run is impressive, and is set to continue. Over the coming months, this market will be one to watch.]]> Tue, 22 Jan 2013 12:21:24 EST 2526013
Want a hot gauge of economic activity? It's probably best to go to the front lines. There are many indicators of economic activity, but they don't all tell the same story. Some are just telling us what's happening now. Others lag the economy -- they are really good at repeating to us what we already know. But others lead activity -- they give us a peek at the future. One of those is the purchasing managers' index, now collected for a wide array of countries. What are these "buyers" telling us?

The story wasn't so great in the summer. Indexes for countries across the planet dipped below 50 -- the growth/decline mark -- signalling rough times in the coming six months. The deterioration was simultaneous, and made the world economy look like it was headed for a double-dip. Activity did not discriminate between developed and emerging markets -- few economies were spared the setback.

Are things now on the mend? It depends where you look. Western Europe is battling an austerity-led recession, and although its composite index has improved, it still forecasts a decline in manufacturing and service-sector activity in the coming six months. Japan's service sector index is back in the black, but its manufacturing index is sinking fast, in spite of the recent drop in the yen. Together, these economies add up to well over a quarter of global GDP, so the trend is disquieting.

But these battered behemoths are not spoiling things for the rest. In spite of their gloom, emerging markets -- even those that are particularly dependent on Europe and Japan -- appear to be on the up and up. Take China, for instance. Buyers in its manufacturing sector moved sharply into positive territory, hitting the highest Index level since mid-2011. Purchases, new orders and inventories were the big contributors to the gain, sentiments that were corroborated in recent Chinese trade data.

As gloomy as recent news has been, Brazil and India both experienced similar surges of stronger growth. Mexico, which has surprised many with its resilience, moved deeper into the growth zone. Among key emerging markets, only Russia faltered, with its manufacturing PMI dropping to 50 in December. Other Asian markets were generally, although not universally, up.

Closer to home, U.S. buyers shrugged off the summer blues quickly, as buyers stepped into action in September. New orders did a lot to bounce the manufacturing PMI back into the black, although Hurricane Sandy dampened some of the enthusiasm. The service sector never stopped growing -- it is less affected by temporary economic swings -- and gained strength toward year-end. New orders were up sharply in November and December, a very positive signal heading into the New Year.

Canada's manufacturers still seem to be in the throes of the summer lull, with the RBC Manufacturers PMI rising marginally in December following a six-month slide. Improvement in the U.S. is likely good near-term news for Canadian buyers, but a big move will require more impressive action stateside. Put the story together, and buyers still seem cautiously optimistic. They have ridden the ups and downs of the economy since the recession, and are unlikely to jump too far ahead of firm orders.

The bottom line? This prescient indicator seems to have erased its mid-summer scare, but it will need to add to recent gains to convince economy-watchers that recurrent soft spots are behind us.]]> Fri, 18 Jan 2013 12:52:53 EST 2487101