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An Occupy DC demonstrator waves a flag in McPherson Square in Washington, Jan. 30, 2012. (KEVIN LAMARQUE/REUTERS)
An Occupy DC demonstrator waves a flag in McPherson Square in Washington, Jan. 30, 2012. (KEVIN LAMARQUE/REUTERS)

BARRIE McKENNA

With U.S. revving up, Canada should be ready to go along for the ride Add to ...

There’s no shortage of gloomy news hanging over the Canadian economy these days. The banks have been downgraded, a housing correction has started, our oil sells at a steep discount, consumers are overstretched.

But the darkness may be obscuring a more positive story.

The potent U.S. economy is poised to shift into higher gear in 2013. Forget that U.S. gross domestic product unexpectedly retreated in the final three months of 2012. That was an aberration, caused by Hurricane Sandy and a temporary drop in defence spending, rather than a harbinger of another recession.

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The bottom line is that a lot of what was going wrong in the U.S. is about to start going right. For the first time in years, economists are talking about “upside risk” to their forecasts.

The good news is that Canada’s export-dependent economy will eventually be carried along for the ride as Americans get back to doing what they do best – buying stuff and producing stuff.

It’s hard to keep the U.S. down for long. Yes, the country has a monster debt and deficit problem to deal with. But the United States remains one of the most innovative, flexible and productive economies in the world. And it’s successfully working off the effects of a 30-per-cent plunge in housing prices and the credit crunch.

Smart people are starting to notice. Goldman Sachs chief executive officer Lloyd Blankfein told CNBC recently that things are finally looking up for the U.S.

“With housing stabilizing, probably going back up, with cash on the sidelines, with the blessings of the energy situation – the U.S. environment is very good,” Mr. Blankfein concluded.

Companies that have been holding back and hoarding cash are starting to spend again. And so, apparently, are investors. U.S. stocks have erased their losses from the crisis and are back near all-time highs.

It’s more than a cyclical bounce. The boom in shale oil and gas has put the country on a path to energy self-sufficiency, and manufacturers are adapting to the challenge from China.

“You can’t underestimate the American entrepreneurial culture,” National Bank of Canada CEO Louis Vachon told a business audience in Montreal, citing Apple, Google and Twitter, among others. “Essentially, all the products that have changed our lives over the last 10 to 20 years are American.”

Canada’s manufacturing sector could start to feel the benefits of the U.S. revival in the second half of this year, Mr. Vachon predicted.

It was inevitable that the U.S. would become an engine of growth for the world again, argued John Curtis, former chief economist at the Canadian Department of Foreign Affairs and International Trade. In a recent paper for the University of Calgary’s School of Public Policy, Mr. Curtis listed the key factors propelling the U.S. rebound, including its innovation and productivity performance, “massive piles” of private sector cash, a devalued currency and a relatively young labour force.

The biggest pop could come in housing, which has been throttled by foreclosures and plunging prices. That’s quickly changing. Prices are rising again, and new home starts are flirting with a pace of a million new units a year. At the height of the boom in the early 2000s the industry was breaking ground on two million homes a year. A return to a more normal market would generate wealth and jobs.

The most serious hurdle is the fiscal challenge. No one would deny that the U.S. has too much debt. But unlike many European countries (and some Canadian provinces), Americans can afford the government they have if they’re willing to pay higher taxes. If Americans accept a little bit less government (modest and phased-in cuts to social security and Medicare, and a smaller Pentagon), the required tax hit could be relatively painless for individuals and the economy.

Canada has an opportunity to latch on to the coming U.S. revival. But it’s going to take a different corporate culture and supportive government policies.

The Asia-driven commodities boom appears to have run its course. The companies that thrive in this new environment will need to be more innovative and focused on value-added exports to overcome a widening Canada-U.S. gap in unit labour costs.

China is a force, but don’t overlook the sleeping giant next door.

Follow on Twitter: @barriemckenna

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