As U.S. recovery blossoms, Canada’s economic hopes pinned to exports

A sustained recovery for the U.S. economy is expected to help alleviate a slowdown in Canada. Economists hope exports into the world's largest economy can offset the effects of new found frugality among Canadian consumers. Getty Images

The last time new car sales were this hot in the United States, it was December 2007. Most will recall what happened next.

For those who don’t, here’s the Coles Notes version: The sector imploded in tandem with the broader economy. General Motors and Chrysler were nearly liquidated while tens of millions of U.S . households were thrown into years of economic purgatory.

But finally, after several false starts, Uncle Sam doesn’t just appear to have taken his marks again – he’s exploded off the starting line.

Like auto sales, housing starts are booming once more. Employers are hiring at the fastest rate since the Great Recession ended, while sentiment — and spending intentions — among business leaders in the world’s largest economy are at their most bullish in more than half a decade.

It’s making believers out of skeptics.

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“We’ve seen it before,” Craig Wright, the top economist at Royal Bank of Canada, said on Tuesday. “But if you look at the breadth of the recovery, the fact that employment’s also kicking in this time, that’s all good news.”

“This is sustainable,” he said.

For Canada’s stalling economy – touted endlessly as a model of financial stability and growth amid the global slide – a genuine U.S. revival can’t come soon enough and could mean all the difference between a temporary lull or full-fledged downturn, economists say.

Here’s how we got here:

It’s no secret that much of the foundation of Canada’s growth and relative prosperity over the last decade has been built on debt. Record accumulation of consumer debt has had the effect of stimulating a broad range of industries, from retail to real-estate.

But at the strong urging of the federal government and the Bank of Canada, alongside measures to constrict lending, consumers in recent months have grown considerably more frugal, most visibly seen in the quickly cooling residential real-estate market.

On Wednesday, data showed home sales in the country’s biggest market, Toronto, fell 17 per cent in March, in line with big declines seen in other major cities.

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As a result, forecasts for the country’s economy have been moving steadily downward, with many currently calling for growth of just 1.6 per cent this year. Targets from late last year pegged growth at north of two per cent.

As a recent story in UK weekly The Economist suggests, “authorities” here are now looking beyond households for a new source of economic growth to avoid further deceleration in the economy.

“The trouble is they cannot seem to find one,” the magazine said.

Enter exporters.

“With government and consumers both pulling back, the growth baton has to be handed off to exports and [business] investment,” RBC’s Wright says.

Suddenly rosy conditions south of the border – where three-quarters of Canadian exports end up – seemingly provide ideal conditions for manufacturers and other export firms to pick up the slack.

The U.S. labour market has added on average 200,000 jobs every month since November, a clip that has the unemployment rate finally flirting with the prospect of dipping below seven per cent in the next year or so.

Housing starts are expected to top one million for the first time since the U.S. downturn, creating what analysts are calling a “super cycle” for Canadian timber producers.

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The U.S. consumer also appears to be in the mood to spend again.

The average selling price of a new car was north of $30,000 in March, a near-record transaction price, according to TrueCar, a U.S.- based market researcher.

While Canadian economists are reaching for the dimmer in their forecasts, U.S. estimates are being raised to a healthy 3.0 per cent this year.

All of this should mean Canadian exporters are firing on all cylinders.

The trouble is they’re not.

Fresh figures this week from RBC Canadian Manufacturing Purchasing Managers’ Index, which is weighted to include firms that ship their goods abroad, declined last month to 49.3, down from 51.7 in February. A reading below 50 means a contraction in activity.

“The most recent data suggests that handoff is not going so smoothly,” RBC’s Wright said.

TD Bank expects figures that will be released on Friday by Statistics Canada to show 20,000 jobs were lost in March.

The losses will likely stem from construction as the domestic housing slowdown continues, but also manufacturing, which the bank says is suffering from lack of investment from owners still uncertain about the macroeconomic environment.

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Jitters from Cyprus’ financial collapse in Europe as well as the so-called “sequester” in Washington, which will pull billions from federally funded programs this year and threatens to claw back the scale of the U.S. rebound have held back orders and activity over the last several weeks, RBC says.

The hope is that the problems are temporary.

“We’re seeing a pause,” Wright said. “But we’re also seeing very pleasant surprises to the upside in the U.S. which should bode well for exports, and the economy more broadly.”

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