Stephen Harper has reason to ride high in his saddle these days. The political and economic ground underneath him is relatively stable, his country continues to draw praise around the world for the way it’s handled events leading up to, during and in the aftermath of the Great Recession and foreign investors, including sovereigns seeking to diversify their reserves, are buying Canadian assets.
Three-quarters of the way through his first year atop a majority government, the Canadian Prime Minister’s Conservative Party still leads opposition parties in public opinion polls, and his personal approval rating remains higher than his potential rivals’. He has a lot of time until he and his party face voters again–the next scheduled election is tentatively scheduled for Oct. 19, 2015.
His legislative path must seem exponentially easier now that he no longer needs the support of an opposition party. And aggressive belt-tightening has his federal government, according to the Toronto Globe & Mail, “well ahead of schedule in reducing the size of [its] deficit.” As of November 2011 the deficit for fiscal 2012, which ends Mar. 31, was CAD17.3 billion, lower than the CAD26.3 billion at the same point in 2010. The government’s most recent deficit target for fiscal 2011-12, provided last fall, was CAD32.3 billion.
Prime Minister Harper and his Conservative Party, at that time working from the top of a minority government, led Canada’s way back into deficit in 2009, part of an effort to provide counter-cyclical stimulus to an economy quickly seizing up because of the erosion of private-sector demand.
But Canada had put together 10 consecutive balanced budgets, and its net government debt-to-gross domestic product (GDP) ratio had collapsed–the good kind–from north of 70 percent to around 22 percent. And there was no need to pump funds that might otherwise support jobs-creating projects into ailing financial institutions. More broadly, demand for new loans recovered because Canadians, buoyed in particular regions by strong demand for commodities around the world but benefitting everywhere because of a general wealth effect, still had jobs and rising incomes.
Canada’s relative strengths have captured attention and capital from around the world. Foreign purchases of Canadian securities recovered rapidly and strongly as the worst of the Great Financial Crisis passed in 2009. Such activity is actually on a new, higher plateau since markets re-stabilized a couple years ago. StatisticsCanada reported in mid-January that foreign purchases of Canadian securities reached a six-month high in November 2011.
The largest inflow in November was into bonds, with net investment of CAD6.2 billion. This was led by purchases in the secondary market for Canadian government debt, both federal and provincial, and investments in new corporate bond issues, split between financial and non-financial corporations.
This not to say Canada is without flaws. But it’s good news, too, that the world is talking about these risks, if only for the simple reason that not enough of this type of examination was happening five years ago. It’s almost always true, as my colleague Roger Conrad points out, that the elements of the next crisis don’t match those of the last, that what gets you is what you’re not looking for.
Nevertheless, it’s important to know where vulnerabilities lie. On this score the recently created Financial Stability Board is doing its job, pointing out this week that household debt is growing, as Canadians take advantage of record-low interest rates to lever up. The concern is that external threats–such as a major sovereign default in Europe that devolves into another full-blown global credit/economic crisis or a hard landing for China–will cause a slowdown that leads to job losses and destroys their ability to make regular interest and principal payments.
The FSB, which is headed by BoC Governor Mark Carney– itself a sign of Canada’s brighter shine in the global financial constellation–advised this week, “Given recent global market developments, it is important for the authorities to continue to strengthen macroprudential surveillance and consider expanding the range of tools at their disposal–which currently include the leverage ratio and various government mortgage insurance eligibility requirements–in order to effectively address any emerging concerns.”
But the Canadian has tightened mortgage-financing rules three times in the last three years. And Finance Minister Jim Flaherty reiterated this month his commitment to making it even harder for Canadians to secure mortgage financing to prevent a US-style implosion. These are still more signs Canada puts prudence above ideology when it comes to managing its economy.
During its most recent interest rate policy statement the Bank of Canada noted that the country’s debt-to-income ratio is poised to rise. At the same time Mr. Carney said so-called “safe haven” inflows of funds into Canada have substantially lowered five- and 10-year bond rates, and banks are passing this on to homebuyers.
Canada has shown in the recent past an ability to manage its virtues in a prudent way. This is reflected in royalties systems and government management of resources that may vary from province to province but in general work to the benefit of all Canadians. It shows up in the general complexion of Canada’s Big Six banks, in which 90 percent of domestic system assets are concentrated but that are built on plain old retail deposits. And Mr. Flaherty may have to act on the mortgage front–again–to slow growth that may threaten the entire system.
While the Federal Reserve is extending its commitment to keep policy rates at historically low levels through 2014, longer now than a prior promise provide the easiest money possible until 2013, the BoC is struggling to justify not boosting its target. Inflation north of the border is trending higher, though it remains within the central bank’s target range. Economic activity around the world–key to supporting commodity prices, including oil, to which Canada’s wealth is tightly tied–appears to be slowing, and there loom threats similar to that which befell what we now know to be a tender global financial system. These factors provide secondary justification for Carney and company to err on the dovish side, for now.
It’s important to note that the Fed is acting in the context of a totally sclerotic legislative system where no fiscal measures to address a stagnant economy will be taken lest somebody somewhere gain an electoral advantage. But that doesn’t make its still extraordinary monetary policy any less fraught.
It seems as clear that Prime Minister Harper–granting great esteem to his shrewdness, on politics and policy, and some of the good decisions he’s made during his tenure–is also the beneficiary of a multi-party, years-long effort to balance Canada’s books. Contrariwise, the United States is currently suffering through an ugly bargaining phase in the aftermath of decades’ worth of bipartisan profligacy marked by self-aggrandizement all across the spectrum, which makes the mutual blame game all the more galling.
This is not an argument that the US is on a road to oblivion. Standard & Poor’s made this public case in August 2011 and since then Uncle Sam’s borrowing costs have only gone lower, a sign that the world still wants to lend it money. We’ll see what happens in coming years; we are concerned about the US political system and its ability to cope with serious short-, medium- and long-term problems.
It is an argument to diversify into markets such as Canada, where relative political, economic and financial stability make for an attractive investment climate. They’ve done better and better managing the blessings of ample resources over decades, they’ve made good budget choices since the early 1990s and their authorities have applied appropriate measures at appropriate times in recent years, as excesses threatened the rest of the developed world.
Relative prudence adds up to relative stability.
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