A Coming of Age for Canada’s Economy?

Is the continued diversion of Canada’s economy from the USA’s a sign that we’ve grown up?

Picture two brothers. The older brother is wildly successful, and the younger brother looks up to his senior sibling all his life, often modeling certain parts of his life after his counterpart. The years go on, and younger brother experiences success also, all the while following the elder’s advice.

One day, younger brother sees a change in older brother. He’s out too late, partying too much, spending too much money on unwise and risky investments. Younger brother decides he’s learned enough over the years and strikes out on his own, making his own decisions, taking his own chances. Sadly, he watches his older brother in a downward spiral into financial trouble and economic uncertainty. Strangely, younger brother’s success is now independent of his older brother. He’s grown up now.

It’s not exactly a subtle parable, I know, and perhaps a tad on the trite side. But I think it can help many understand what is going on in the North American economy. The US is in a tailspin, while we’re flying high. Our economy is booming, while there is talk of the dreaded “R-Word” in the US.

The sub-prime mortgage issue in the states has not affected us here in Canada as much as many thought it would. When the story broke, people started to panic. Our economy, for so long, has been tied to the fortunes of the larger, more powerful economy of the USA, that people were certain that it meant economic doom north of 49. But it didn’t. Canada’s economy has come of age.

But why? Anyone with a basic understanding of economics can see that Canada is in a much healthier position than the USA for a strong economy. The US economy is largely based on consumer spending. If they stop buying things, it slows the economy down. The US is a net importer; their trade deficit is enormous. Canada is a net exporter. And what we export is in demand. Oil, forest products, minerals, metals, grain. Demand from Asia has partially replaced some of the lower demand from our number one trading partner, the USA (due to their flagging dollar).

And the strong Loonie helps too: much of what we buy in Canada is imported. As our dollar climbs, importers can bring goods in more cheaply and either pass on the savings to consumers, or make more profit, further fueling the economic cycle.

Finally, Canada’s successful economy vis-a-vis the American one is also partly due to divergent fiscal policies between the two countries. We saw what was going on down there and struck out on our own. We watched inflation carefully. Canadian banks didn’t risk it with the sub-prime lending.

Can we sustain this pace without the larger economic powerhouse of American consumer spending buying our goods and services? It’s unknown at this point – we’ll have to wait and see. Or has the time of the US economy setting the pace for the North American economy come and gone?

-Tim