Economy: Canada rises above the crisis
Financial Times
By Bernard Simon
The host of the G8 and G20 summits may be forgiven a smidgen of self-righteousness during the leaders’ forthcoming meetings in Ontario.
Canada’s economy and banking system are in better shape than most other summit participants, and Stephen Harper, the prime minister, has made no secret of his eagerness to capitalise on that performance.
He told the Financial Times this month: “Canada was one of the few developed countries that did not have a crisis in its financial sector … We’re very optimistic and bullish about the future of our own country.”
For once, Canada has been able to plough a different furrow from its southern neighbour, even though the US makes up three-quarters of its foreign trade. “The Niagara River was a Berlin Wall as far as financial contagion was concerned,” says John Kirton, director of the G8 research group at the University of Toronto’s Munk Centre.
Canada sank into a brief recession in 2008, but its growth rate in the first quarter of this year, at 6.1 per cent, was double that of the US. House prices in Toronto and Vancouver have hit new records in recent months. In another break with the past, the jobless rate north of the border, at 8.1 per cent, is well below the US’s 9.7 per cent.
On fiscal policy, Mr Harper’s minority Conservative government has a more realistic chance than the US of balancing its books within the next few years, even as it cuts personal and corporate taxes.
According to preliminary finance department data, Ottawa ran a record deficit of C$47bn ($46bn) in the year to March 31. The finance minister Jim Flaherty projects a similar shortfall this year.
But at 3.4 per cent of gross domestic product, Canada’s deficit is more manageable than that of many summit partners. The debt-to-GDP, at 35 per cent, is the lowest among leading industrial economies.
Mr Harper has insisted that a two-year stimulus package of spending and tax breaks will come to an end as scheduled in March. A big chunk of last year’s deficit was also due to Canada’s one-off contribution to the bail-out of General Motors and Chrysler.
On the banking front, Ottawa has provided liquidity support but no direct capital infusions. All six of Canada’s biggest banks have maintained their dividends. Two – Royal Bank of Canada and Toronto-Dominion – are among only half a dozen banks worldwide that still enjoy a Moody’s triple-A credit rating.
The banks owe their strength mainly to their vast and stable domestic retail business, and their limited exposure to the toxic securities that landed many US and European counterparts in trouble.
Paul Volcker, former head of the US Federal Reserve and an adviser to President Barack Obama, told the Financial Times earlier this year that Canada’s good fortune is “partly a cultural thing – they are more conservative”.
That conservatism was in evidence in the mid-1990s when the Liberal government of the time laid the groundwork for today’s manageable public finances with spending cuts that turned a worrying deficit into 12 consecutive years of surpluses.
Canada’s centralised and co-ordinated system of bank regulation has also played a critical role, keeping institutions in line with strictly enforced capital requirements, quality of capital rules and leverage ratios. The superintendent of financial institutions maintains a close relationship not only with bank officials but also with their boards.
For all these safeguards however, Canada is by no means assured of a never-ending upswing. As a big producer of oil, natural gas, forestry products and potash, among other resources, it remains vulnerable to volatile commodity markets. Its automotive industry, still the biggest manufacturing sector, is almost totally reliant on US car buyers.
The Canadian banks have not always been as prudent as they were during the last boom. They have burnt their fingers in the past through heavy exposure to such volatile sectors as commercial real estate, energy and emerging markets.
As far as public finances go, the Toronto-based Institute for Competitiveness and Prosperity noted in a recent report on Canada’s long-term prospects that “huge federal and provincial deficits will necessitate fiscal belt-tightening”.
Mr Harper admonished his G20 colleagues a few weeks ago that “we must deliver firm, credible plans that will put our countries on a path to fiscal sustainability. We can confront our fiscal challenge with clear and realistic plans for fiscal consolidation, or we can wait for markets to dictate the terms for us.”
Yet Mr Harper’s own minority government has presided over a surge in public spending since it took office four years ago. The prime minister has yet to prove that he is willing and able to practise what he preaches on fiscal restraint.
