Canada Loses Haven Status as Dollar Doesn’t Spark Exports
Canada was the envy of developed economies following the global recession, boasting the world’s soundest banks and a robust housing market that helped push its currency above parity with the U.S. Those days are gone.
The dollar plunged to a four-year low yesterday and returns on Canada’s benchmark stock index were less than half of U.S. equities last year, underscoring an economy beset by the slowest rebound in exports since World War II. Consumers are tapped out with record household debt and governments are more focused on erasing budget deficits than providing stimulus.
With the outlook for other major economies improving and “the lack of job growth and economic growth here in Canada, comparatively I think we’re going to be sub-par for a little while at least,” said Brad Bardua, chief financial officer of Avigilon Corp. (AVO), the Vancouver-based maker of digital surveillance systems.
The recovery is so sluggish that Bank of Canada Governor Stephen Poloz may move as early as today to signal easier monetary policy while the Federal Reserve takes steps to taper stimulus, according to Gluskin Sheff & Associates Chief Economist David Rosenberg in Toronto and Sebastien Galy, senior forex strategist at Societe Generale SA in New York.
The International Monetary Fund yesterday forecast Canada’s economy would expand 2.2 percent this year, trailing both the U.S. and U.K. among Group of Seven countries. In 2009, Canada was the leader of the G-7 pack.
Missing Improvement
“The improvement in Canada hasn’t really been there since we started from a higher level,” said Malcolm J. Jones, a portfolio manager at Adroit Investment Management Ltd. in Edmonton, Alberta, who oversees about C$500 million ($456 million) of fixed-income securities.
The world’s 11th-largest economy, which relies on exports for about 30 percent of output, is struggling to build momentum for shipments abroad even as the dollar falls and the U.S. economy gathers steam. While the U.S. takes in about 75 percent of Canada’s exports, energy shipments have declined since 2011 as U.S. supplies have grown. Exports of metals have also fallen while auto and parts shipments are little changed over the past year.
“Fundamentally, Canada is a trees and rocks economy,” said David Garofalo, chief executive officer of Toronto-based HudBay Minerals Inc. by phone. “The weakness in the Canadian dollar reflects a softening of the commodities space.”
The Canadian dollar dropped beyond C$1.10 per U.S. dollar yesterday for the first time since 2009. At that time, the country was emerging from recession, buoyed by banks that remained solvent through the credit crisis and consumer that were ready to spend. The currency remains stronger than it was at any point from 1976 to 2006 — as it averaged 1.2870 per U.S. dollar during that period.
Stagnant Exports
Exports have been stagnant for more than two years, with shipments 19 percent below where they would be if the recovery followed the average of the last four economic cycles, according to Statistics Canada data compiled by Bloomberg.
“The big gap between our exports and the U.S. economy is the result of lost market share,” said Krishen Rangasamy, senior economist at National Bank Financial in Montreal. “That is the legacy of 10 years of the loonie appreciating,” he said, using the nickname for the Canadian dollar.
Canada’s benchmark Standard & Poor’s/TSX Composite Index has risen 9.1 percent over the past year, trailing the 24 percent gain for the Standard & Poor’s 500 Index, the third straight year of underperformance. Canadian government bonds due in five years or less yield more than U.S. Treasuries, with longer-dated U.S. debt carrying higher yields.
Canada’s manufacturing base has shrunk, meaning a weaker currency will provide less of a spark that it would have in the past.
Job Losses
Bombardier Inc. (BBD/B) said yesterday it was cutting 1,700 jobs in its aerospace division, or about 6 percent of the work force. The Montreal-based company is working to produce its new CSeries regional jet, a plane whose debut has been pushed back four times.
In December, Battle Creek, Michigan-based Kellogg Co. (K) closed a plant in London, Ontario, firing 500 workers who had produced Corn Flakes and All-Bran cereal. Weeks earlier, HJ Heinz Co., the ketchup-maker owned by Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital, closed its plant in Leamington, Ontario, cutting 740 jobs.
“The tomatoes are going to go to the plants that have the low production costs,” Buffett said in November at an event in Detroit. “It’s really a question of having an unprofitable plant and concentrating production in a more profitable plant.” Heinz is based in Pittsburgh.
BlackBerry Cuts
Waterloo, Ontario-based BlackBerry Ltd. (BBRY) cut 4,500 jobs and wrote down $960 million of inventory in September. The smartphone maker, whose devices were once known as CrackBerrys for their addictive nature, now holds less than 3 percent of the global smartphone market.
Canada added a net 102,000 jobs last year, a 0.6 percent increase that was the slowest since 2009, Statistics Canada reported this month.
Stimulus options are limited. Canadian consumers, who took advantage of low interest rates and led the recovery by buying houses and cars, now face record levels of debt as a share of income. By contrast, U.S. debt burdens have been declining since a peak in 2007.
Governments, both federal and provincial, are paring deficits. While opposition lawmakers called for stimulus after the latest employment report, Finance Minister Jim Flaherty, who may introduce a new fiscal plan as early as next month, has ruled out major spending initiatives as the government seeks to return to surplus by the year beginning April 2015.
Short-Sighted Analysts
Prime Minister Stephen Harper said in an interview last week that analysts focusing on the sliding currency and weak jobs reports are being short-sighted.
The Canadian government has been “pleasantly surprised” by the strength of the Canadian economy since the end of the global recession, in the absence of similar growth for the country’s largest trading partner, Harper said.
“The strength of the American economy is a big deal,” Harper said Jan. 16. “For us to have better results we need to see the American economy expand.”
Economists are counting on the weaker loonie to boost exports and revive the economy. The Canadian dollar has dropped 10 percent in the past three months and foreign investors cut purchases of the country’s bonds last year, showing the country’s status as a haven is over.
Foreign investors bought a net C$36.9 billion of Canadian bonds through November last year, Statistics Canada reported last week, down 47 percent from C$69.8 billion in the same period of 2012.
Currency ‘Give-Back’
The currency’s drop “is a give-back to some degree,” said Andrew Gretzinger, fixed income portfolio manager with Manulife Asset Management in Toronto, which oversees C$16 billion in assets. “Canada had done better during the crisis.”
Canada’s superlative economic performance following the global recession made the economy a magnet for foreign investment and helped Mark Carney, then Bank of Canada governor, land a new job running the Bank of England.
“Canada is boring, it’s our trademark,” said Adroit Management’s Jones. “All of the exciting money is rushing out of Canada.”
Governor Poloz, who spurred the currency’s plunge by dropping a bias in October to raise interest rates, projects the weakness will help exports recover after the country recorded 23 straight monthly trade deficits.
Rate Announcement
Poloz will update the central bank’s economic forecasts and make an interest rate announcement at 10 a.m. in Ottawa today. While all 21 economists surveyed by Bloomberg forecast he’ll keep the main interest rate at 1 percent, investors will be looking to see if he introduces a bias to lower rates in the accompanying statement.
None of the 17 economists surveyed by Bloomberg News last week predicted the central bank would introduce an easing bias today.
Exports and investment have been disappointing and inflation has been “lower than we can explain,” Poloz said in a Dec. 18 interview in Ottawa.
To date, Poloz has pleaded for patience. The drop in the Canadian dollar is more reflective of the U.S. rebound, he said, and that will turn into more exports and spending.
“As we get a bottom in this through stronger exports from the stronger U.S. economy we are going to see, I think, the manufacturing sector recovering,” Poloz said. “That’s just the nature of how it works.”
Other commodity-linked currencies have been sliding against the U.S. dollar. The Australian dollar is down 8.7 percent in the past three months, while the South African rand is off 9.1 percent.
The depreciation is a boon for Avigilon, Bardua said. “It makes certain aspects of our business a little more costly but that’s overshot by the revenue side.”
To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net
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