Sunday, November 25, 2007

FP talks decoupling

Is the Canadian economy decoupling from the U.S.?

While the U.S. economy sputters on the back of a collapsing housing sector, its Canadian counterpart continues to hum along, suggesting that it may be decoupling from its neighbour to the south.

It is considered a rare occurrence when Canada decouples from the U.S. economy, and when it happens, it is usually quite temporary, Export Development Canada chief economist Stephen Poloz said earlier this year.

Typically, the two domestic economies are considered more synchronized, which in this case, means Canada could follow the U.S. into a slowdown. But BMO Capital Markets chief economist Sherry Cooper nonetheless thinks there is reason to be believe decoupling can happen this time around.

Why? The trade situation, which can cloud the picture since most Canadian exports go to the U.S., shows that these exports have sagged 3.3% year-over-year, Ms. Cooper said in a research note. Meanwhile, exports to the rest of the world are up 25.5%. This 28.8% growth rate gap is slightly above average for the past 12 months – but it has helped keep Canadian GDP steady, despite cooling U.S. growth, she noted.

Exports to the U.S. have fallen to 75% of all of Canada’s exports, the lowest level in 15 years and down from a record of 85% at the end of the tech boom in 2000, Ms. Cooper said.

At the same time, improving external debt for Canada (relative to the size of the economy, net foreign debt was just 8.1% in Q2, compared to a peak of 44.3% in early 1994) “explains in part why debt markets and the currency have not sold off during recent global financial turmoil.”

--I think this article misses the point that the Canadian and American economies have always been fundamentally different. Canadian exports consist mainly of commodities, e.g. lumber, energy. While the US economy exports highly refined goods, e.g. computers, aircraft. Sure you can say that with increased globalization Canada is now less dependent on the United States, but I think most of the difference is due to the raise in energy prices, driving the Canadian trade surplus, and the American deficit up. Get the full version here

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