Politicians have been singing the praises of Canada's economy - and there's good reason for that - but the fact of the matter is that it will probably lag the United States for the next two years.
The Canadian dollar has been strong, in part because of the economic outlook, Ottawa's finances compared to other countries, and strong commodity prices. Foreign investors have been flooding in. The economy has regained all the jobs lost to the recession, and then some, and its banking system is a model to the world.
In a report Thursday, Scotia Capital economists list 5 reasons why Canada's economy is likely to underperform that of the U.S. this year and next.
"The smugness the nation may have felt while outperforming in recent years will give way to being unable to play catch-up to the extent to which other economies might," said Derek Holt and Gorica Djeric.
Their five reasons:
1. While the United States has put off "fiscal contraction" until next year, and probably will again until 2013, Ottawa has not. "Canada is allowing fiscal stimulus to drop off the books. This may very well be a long-run positive, but it means a bigger short-run fiscal drag effect north of the border."
2. Canadian companies weren't as aggressive as their American and Euorpean counterparts. That's because there was no bank crisis in Canada, and it wasn't as hard to finance them. "That led to outperformance of the economy through milder job and production cuts. But as a result, inventories as a share of sales are near record lows in the U.S., but remain elevated in inflation-adjusted terms in Canada at lower than recession levels, but higher than the pre-recession starting point that itself was the highest in the cycle. Canadian businesses had mismanaged their inventories prior to the downturn, so the notion that Canada only went down because of the problems abroad while its own house was in order remains a myth."
3. There is no "pent-up" consumer demand in Canada.
4. As for pent-up housing demand, the crisis in the United States, while throwing millions out of their homes and becoming the focus for the meltdown, nonetheless may have led to the best housing affordability in some time. "Canada has not. In fact, Canada is at cycle tops on housing variables like the home ownnership rate, house prices and leverage."
5. Lost export competitiveness, which, of course, has been a rallying cry of Bank of Canada Governor Mark Carney, who has urged Canadian businesses to boost their productivity. "Canada will be more constrained in leveraging the implications of a U.S. recovery this cycle compared to past recoveries because poor productivity growth and [the Canadian dollar's] level have impaired the competitiveness of the country's exports."
For these reasons, the economists said, the Bank of Canada is likely to hold interest rates steady for longer than markets expect.