Canadian Economy Suffers Parity’s One-Eyed King in Land of Blind

Canadian Economy Suffers Parity’s One-Eyed King in Land of Blind

Canada’s success in parlaying strong
economic fundamentals into a rush of foreign investment has come
at a cost: weakened manufacturing competitiveness that’s
exacerbating a regional divide between the resource-rich west
and the factory-heavy east.
Caterpillar Inc. and Controladora Mabe SA are closing
plants in Ontario and Quebec, partly because record foreign-debt
purchases are keeping the dollar near parity with the U.S.
currency, boosting their costs. Out west, Jim Prokopanko,
president of fertilizer maker Mosaic Co., says there’s a “gold-
rush” to find workers, and Alberta is trying to win permits for
multibillion-dollar oil pipelines.
“In the land of the blind, the one-eyed man is king, and
that is Canada right now,” said Eric Lascelles, chief economist
at Royal Bank of Canada Global Asset Management, which oversees
about C$250 billion ($252 billion). “The two big things driving
Canada are credit and commodities,” and “we have avoided some
of the real headaches that the heavily indebted countries have
encountered.”
Canada’s currency will trade close to parity with the U.S.
dollar into next year, based on the median estimate of 24
responses to a Bg News survey. Two-year bond yields will
remain below 2 percent, according to a separate Bg
survey, as inflation slows and the government reduces its C$31
billion deficit, which officials are projecting will be
eliminated by the 2015-2016 fiscal year.
Foreign purchases of Canadian debt have set records in the
past three years, including a tenfold jump in money-market
investment last year to C$32 billion and C$96 billion of bonds
in 2010, according to Statistics Canada.

Pimco Bets on Canada

Pacific Investment Management Co., the world’s largest
bond-fund manager, is betting on the country’s longer-term debt
because of Canada’s stability and its “strong resource
sector,” which makes it “less sensitive to shocks,” Ed
Devlin, who manages Pimco’s $11 billion Canadian portfolio, said
in a Feb. 10 interview.
The world’s 10th largest economy, Canada has the third-
largest pool of oil reserves, and, according to a 2010 speech by
Finance Minister Jim Flaherty, is the biggest producer of
potash, second largest supplier of nickel and third largest
provider of aluminum.
Canada’s banks were named the soundest in the world for the
fourth consecutive year in 2011 by the World Economic Forum, and
Bank of Canada Governor Mark Carney was chosen in November by
leaders of the Group of 20 nations to head the Financial
Stability Board. The board is charged with overseeing efforts to
write new rules for international finance to help avoid another
global credit crunch.

Leading the G-7

The International Monetary Fund projects Canada will lead
the G-7 with a gross debt-to-output ratio of 73 percent at the
end of 2016, lower than 75 percent for Germany, 115 percent for
the U.S. and 253 percent for Japan.
Canada’s central bank dropped a “conditional commitment”
to keep its benchmark overnight lending rate at a record low
0.25 percent in 2010, and Carney, 46, has held it at 1 percent
since September of that year, the longest pause since the 1950s.
In the same period, eleven of the 20 biggest economies have cut
rates, and the U.S., Japan, U.K., Switzerland and European
Central Bank adopted or extended emergency stimulus or lending
in the last year.
All this has supported Canada’s dollar, which has
appreciated 5.7 percent against the U.S. currency since Sept. 1,
2010. Canadian government bonds have returned 8.5 percent in the
same period through Feb. 17, compared with 6.6 percent for U.S.
Treasuries.

Weighed Down

Canadian equity returns have trailed the U.S. in that time,
with the Standard & Poor’s/TSX Composite Index weighed down by
Waterloo, Ontario-based BlackBerry-maker Research in Motion Ltd.
Canada’s benchmark stock index is up 3.8 percent since September
2010, compared with a 26 percent gain for the S&P 500.
Caterpillar’s shutdown of its London, Ontario, locomotive
plant, which employed about 775 people, has come after it failed
to reach a new collective agreement with the Canadian Auto
Workers union.
“The cost structure of the operation was not
sustainable,” a subsidiary of the Peoria, Illinois-based
company said in a Feb. 3 statement. Caterpillar began making
trains in Indiana last year.
Mexico’s Mabe is closing its Montreal facility by the end
of 2014 because the factory, where about 500 people currently
work, “cannot be made financially viable,” the company said in
a Jan. 26 statement. The Canadian dollar has risen “almost 60
percent over the past decade, and 90 percent of the dryers
produced at the Montreal plant are exported to the U.S.”

‘Better’ Than America

“Canada’s fiscal system and debt situation is better than
the Americans’ now and that makes Canadian assets a better buy
and more stable, but it keeps the Canadian dollar higher than it
should be in terms of competitiveness,” Robert Mundell, a
Canadian-born Nobel-prize winning economist, said in a Feb. 9
interview at Bg’s New York headquarters.
The Caterpillar closing set off a national debate that
includes questions about whether Conservative Prime Minister
Stephen Harper, who visited the factory in March 2008, should do
more to save such jobs. Manufacturing employment fell by 2.5
percent in the 12 months through January and by 21 percent in
the last decade, reducing the share of factory jobs in the
workforce to 10 percent.
Canadian labor costs in U.S. dollars have doubled since
2002 on weak employee efficiency and the rise in the currency.
Unemployment climbed to a nine-month high of 7.6 percent in
January, as job growth slowed, with rates in Ontario and Quebec
at 8.1 percent and 8.4 percent.

‘Sitting on Their Hands’

“The Conservatives are sitting on their hands while
foreign investors ship good Canadian jobs abroad,” New
Democratic Party leader Nycole Turmel said during a Feb. 9
debate in Parliament.
Industry Minister Christian Paradis responded by saying he
was “disappointed” by the closing, and the government “is
determined to send the most favorable message possible to
investors around the world to promote Canada as a secure and
stable country and a great place to do business and invest.”
Foreign funds have been flowing into Alberta, where the
jobless rate is 4.9 percent. The province has drawn energy
investment from China, Thailand, South Korea, United Arab
Emirates, Europe and the U.S. The Export-Import Bank of China
and Canaccord Financial Inc., Canada’s largest independent
brokerage, said Feb. 9 they will set up a $1 billion fund to
support Canadian-resource businesses.

Main Attraction

The main attraction is Alberta’s oil sands, which hold more
crude than Iran, Iraq or Kuwait, according to the June 2011 BP
Statistical Review of World Energy. The Canadian Energy Research
Institute forecasts companies will invest C$137 billion by 2020
to tap into oil-sands reserves that it estimates are 173 billion
barrels.
Imperial Oil Ltd. on Feb. 3 approved a C$2 billion
expansion of its Cold Lake project in Alberta, which will add
production of more than 40,000 barrels a day. Mullen Group Ltd.,
based in Okotoks, Alberta, said Jan. 12 it will increase capital
spending by C$25 million to a total of C$100 million this year,
to take advantage of demand from oil-sands companies for oil-
field and trucking services.
Alberta needs several pipelines to market its oil,
provincial Finance Minister Ron Liepert said in a Feb. 13
interview at Bg’s New York headquarters. One would be
TransCanada Corp.’s $7.6 billion Keystone XL project, which U.S.
President Barack Obama delayed last month. It would deliver
700,000 barrels a day to refineries on the Gulf of Mexico.
“If we are going to be a global energy superpower, we have
to have a global marketplace,” Liepert said.

‘Real Challenge’

The boom has made hiring a “real challenge” for Plymouth,
Minnesota-based Mosaic, as it competes with energy companies in
the region, according to Prokopanko, who is also the fertilizer
producer’s chief executive officer. “It’s a gold-rush, boom-
town mentality,” he said in a Jan. 27 interview at the World
Economic Forum’s annual meeting in Davos, Switzerland.
Energy’s contribution to Canada’s economy was highlighted
in November, when gross domestic product fell an unanticipated
0.1 percent to an annualized C$1.27 trillion. Output from oil
and gas extraction and mining declined 2.2 percent to C$57.7
billion, which Statistics Canada said accounted for most of the
shortfall. A Bg survey predicted 0.2 percent growth.
The economy still is forecast to expand 2 percent this year
after an estimated 2.4 percent in 2011, even as global weakness
and the strong dollar remain a challenge to exports, the Bank of
Canada said last month.
“Canada is still a pretty strong performing economy on a
relative basis,” said David Denison, who oversees C$152.8
billion as chief executive officer of Canada Pension Plan
Investment Board. “Are there signs of caution? Absolutely.”