What a strengthening U.S. economy means for Canada

The U.S. Commerce Department’s first (or “advance”) estimate of GDP for the three months ended Sept. 30 pegged the annualized growth rate at 3.5 per cent, down from a sizzling 4.6 per cent in the second quarter but still signalling a U.S. economy that has taken flight after years of post-recession false starts. The recent recovery has been marked by impressive employment growth and an improving housing market, which are seen as key components to sustaining the good economic news. Consumer spending and manufacturing activity have both been accelerating.

Because of Canada’s heavy dependence on exports and natural resources, its economy has been described as having more in common with much of the developing world than with mature, advanced heavyweights such as the United States, a net importer where the consumer and services sectors are more dominant economic drivers. Nevertheless, history shows that economic growth in Canada quite closely tracks that of its much larger neighbour, generally slowing and accelerating more or less in unison.

The key to this close relationship is trade. In 2013, fully three-quarters of all Canadian exports went to the United States. By comparison, Canada’s next biggest market, the European Union (excluding Britain), accounted for just 4 per cent. The U.S. consumes about 97 per cent of Canada’s oil and gas exports, nearly 80 per cent of its manufacturing exports, and about half of its mineral and agricultural exports.

Not surprisingly, then, Canada’s exports have soared as the U.S. economy has gained steam. Total exports hit a record $45.5-billion in July, including $34.1-billion to the United States, the second highest total in history. Growing U.S. consumer and business demand has driven export gains in such areas as energy (up 21 per cent for the year to date), motor vehicles and parts (up 8 per cent), and building materials (up 10 per cent).

But the one area that Canada hasn’t been keeping pace is in the value of its currency. The U.S. economy’s superior growth pace has put it on track to reach its full economic capacity considerably earlier than other advanced economies – and that means its central bank, the Federal Reserve, is on track to raise interest rates ahead of the pack, too, in order to stabilize growth and keep inflation from building. In anticipation, the U.S. dollar has been a favourite of investors, attracted to the currency by the prospect of superior returns delivered by rising interest rates. The Canadian dollar has fallen below 90 cents (U.S.), from roughly 96 cents a year ago, and currency analysts believe it could creep down to the 87-cent level in the next year. But a lower Canadian dollar makes Canadian exports cheaper for U.S. buyers – so the currency weakness could provide a continued export boost for Canada’s economy.