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The Numbers: “Canada Is North America’s Growth Engine”

By Roger Conrad and David Dittman on June 1, 2010

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Two days, two new data points that separate Canada from its developed-world peers. It’s plain that the world is undergoing a significant adjustment in economic growth leadership, a change that will leave the US, the world’s foremost military power, atop the chain but will see emerging economies displace traditional powers among the global elite.

Recent developments suggest that emerging Asian powerhouses China and India are leading the region’s ascendance, a process that will see Europe’s relative importance diminished. But Canada is different than the rest of the G-7, though, in one tangible respect that ensures its prosperity in the coming decade and well beyond: Its lands contain what’s considered the second-largest recoverable oil reserves on Earth.

This factor gives it emerging-market qualities. Combined with stable political and financial systems and a tax structure that will soon be among the most hospitable to business and you have what has to be among the best places to invest in the world. The trend of conversions by high-yielding income trusts into high-yielding corporations separate it from all others.  

The big picture indeed displays Canada in a very fine light. Announcements from the government’s official data agency and the country’s central bank once again demonstrate that Canada was in better condition when an otherwise ordinary downturn morphed into a hideous, jobs-and-balance-sheets-killing Great Recession when Lehman Brothers’ implosion set in motion a global credit freeze.  

On Monday morning Statistics Canada reported that real gross domestic product (GDP) expanded at an annualized rate of 6.1 percent in the first quarter. Canada grew at a rate of 4.9 percent in the fourth quarter. The US economy expanded at an annualized pace of 3 percent in the first quarter.

Canada grew faster in the first quarter of 2010 than in any other 12-week period since 1999, a sure reflection of the Great White North’s growing ties to emerging economies in Asia. As StatsCan noted in an April report, Canada’s short, shallow recession was caused not by disruption of the production and employment cycle but by falling commodity prices.

Growth for the 12 weeks ended March 31 was stronger than the 5.8 percent both the Bank of Canada (BoC) and Bay Street analysts had forecast. During the first quarter of 2009 Canada contracted by 7 percent. But once global efforts as monetary and fiscal stimulation took hold demand for oil, in particular, resumed its upward trajectory, and Canada bounced back.

A commodity-price correction is far easier to recover from than the type of cyclical downturn that leads to mass layoffs of the sort that erode final consumer demand. Details in StatsCan’s GDP report support the case: The decade-best quarter was driven by continued growth in consumer spending and manufacturing, good news in the face of concern about the impact this sector of a strong currency.

Production grew faster in the first quarter of 2010 than in the fourth quarter of 2009, and inventory levels rose after being drawn down in all four quarters of 2009. Residential investment increased for a fourth consecutive quarter, as did consumer spending on goods and services. Export and import volumes both rose for a third consecutive quarter, with growth in imports outpacing growth in exports in the first quarter.

Notably, growth in government current expenditure on goods and services slowed to 0.5 percent, following increases of 1.6 percent in the third quarter of 2009 and 1.7 percent in the fourth. After five quarters in which growth averaged over 4 percent, government capital expenditure advanced 1.1 percent in the first quarter.

Consumer price levels, job creation and housing sales are all rising in Canada, pointing to a solid recovery. The US is closer to, at least, disinflation than rising inflation. Consumer demand is still weak; in April consumer spending barely rose after six consecutive monthly gains. And unemployment remains stubbornly high. The Federal Reserve is unlikely to begin its rate-hiking cycle until 2011.

On Tuesday morning, following through on a move it telegraphed in its last policy statement, the BoC boosted its benchmark interest rate from its effective lower bound, 0.25 percent, to 0.5 percent, making it the first among the G-7’s central banks to increase the cost of borrowing since a series of cuts designed to combat the impact of the global recession and financial crisis took rates to record lows in most of the world’s major developed economies.

In a statement accompanying its decision the BoC included language that suggests this could be a one-off move, and expressly noted that at 50 basis points the overnight lending rate establishes plenty of room for monetary stimulus.

Long-term factors such as the soundness of its financial system and its abundant and in-demand natural resources support a strong Canadian dollar. The loonie is likely to resume a flight toward parity with the US dollar (and beyond) that had been interrupted by short-term worries about the sustainability of the global recovery.

The loonie swoons on growth concerns, soars when investors pay attention to the quality of its supports, namely a sound financial system and a tremendous store of natural resources. This makes Canada the ideal play when fear grabs hold of everyone else and causes the irrational cascade. Scoop them up and set them in your portfolio when they get cheap.  

If you’ve made the move to Canadian income trusts, you understand well the comfort that comes with a reliable distribution stream. And you certainly appreciate the market-beating bounce-back trusts as a group made during the post-March 2009 rally. There’s no rational reason on Earth why this collection of high-yielders won’t be able to pump out consistent dividend streams once the calendar turns to Jan. 1, 2011.

A large number will be able to protect cash flow from Revenue Canada–the Great White North’s equivalent of the Internal Revenue Service–for several years into the next decade because of significant tax pools built up through capital investment.

Setting aside the hostility shown by the Oct. 31, 2006, announcement of the “Tax Fairness Plan,” Canada is among the–if not the–most friendly environments for investors in the world.

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