| CanWest News Service |
Friday, November 09, 2007
OTTAWA - Evidence that the powerful dollar's grip is starting to choke the Canadian economy mounted at week's end with worse-than-expected news that the country's trade surplus has shrunk to its lowest level in nearly a decade, and that personal and business bankruptcies are beginning to rise.
Friday's reports are the latest indication, following evidence that the domestic housing market is now cooling as well, that the currency's external assault on the economy is sapping domestic strength as well, prompting at least one forecaster to cut its outlook for overall economic growth next year to less than two per cent.
The loonie closed at $1.0606 US on Friday, down from $1.0684 US the previous day.
"Canada's trade surplus was much weaker than expected in September as exports fell and imports surged in reaction to the sharp appreciation of the Canadian dollar," said Ted Carmichael, economist at investment banker J.P. Morgan.
His comments followed Statistics Canada's report that falling exports and rising imports cut Canada's surplus in the trade of goods to just $2.6 billion in September, the same month that the loonie reached and passed parity with the U.S. dollar.
Exports fell 2.3 per cent to $37.7 billion, the lowest level since October 2006, with only three sectors - auto products, energy products, and consumer goods - recording gains, while imports rose 2.2 per cent to $35.1 billion, led by a reduction in purchases of energy products.
The weaker-than-expected performance suggests the drag on overall economic growth from trade will be a record 8.2 per cent in the third quarter, double J.P. Morgan's previous estimated, Carmichael said.
As a result, it is cutting its forecast for quarterly growth to an annual pace to 1.8 per cent down from 2.2 per cent and its forecast for all of 2008 to 1.9 per cent from 2.1, he added.
The profit squeeze on manufacturing from the strong currency "will be brutal," he said, estimating it could wipe out another 150,000 jobs in the already shrunken sector.
Worries about the impact of the unprecedented strength of the currency - one has to dig back in history to the 1880s to unearth a stronger Canadian dollar - finally sparked an expression of concern at the highest political levels this week, with Prime Minister Stephen Harper conceding that it is presenting "challenges."
At the provincial level, Quebec's premier - who along with Ontario's, has already appealed for interest rates cuts to take some of the upward pressure off the loonie -_called this week for a federal-provincial summit to tackle the issue. Harper, at a news conference Friday, said he hopes to hold a meeting with the premiers by January.
However, a growing number of analysts say the federal government itself has slammed the door on hopes for any quick interest rate relief with its surprising $60 billion tax relief package.
"Given the lack of inflation relief (from the strong dollar), very strong employment growth even after losses in manufacturing, and tax cuts to further stimulate the economy, it seems the bank has really no choice but to stand pat for now," UBS Securities Canada said Friday, echoing comments by other analysts earlier in the week.
However, the loonie, while still only a few cents shy of its modern-day high reached earlier in the week, continued to retreat Friday amid signs that the weakness in the U.S. greenback is starting to improve the trade performance of Canada's largest export market.
The U.S. trade deficit unexpectedly narrowed in September to a more than two year low of $56.5 billion US, as a strong increase in exports outpaced a modest rise in imports.
"It is clear that the U.S. export sector is benefiting from the weaker dollar and resilient global demand," said TD Securities economist Charmaine Buskas. "On balance, this report is a net positive for U.S. growth, and is in line with our expectation that the continued improvement in the U.S. trade deficit will offset some of the deterioration in the housing market."
And that would be good news for Canada as well.
But there's been no improvement in the confidence of American consumers, which according to one major barometer of their mood fell this month to its lowest level since Hurricanes Katrina and Rita smashed into the Gulf coast of the U.S. and sent oil prices soaring, and the second lowest level since the early 1990s recession.
"The current level of confidence is getting dangerously close to the normal threshold of contraction in spending," said National Bank of Canada's Stefane Marion. "The theory that spillover effects from the housing downturn on the all-important consumer sector would be limited is about to face a true test."
CIBC World Markets, meanwhile, pointed to the formation of cracks in the still-strong domestic-side of the Canadian economy, which the Bank of Canada has been counting on to offset the weakness on the trade side and support overall economic growth.
"Quietly, below the radar screen, the number of bankruptcies in Canada is rising," CIBC economist Benjamin Tal noted.
As of September, personal bankruptcies were rising at their fastest pace in three years and business bankruptcies at their fastest rate in nearly six years, the CIBC report said.
And they are likely to rise even faster further down the road, it warned.
"Importantly, these numbers do not catch the impact of the most recent surge in the value of the dollar, a fact that in all likelihood will work to take the number of insolvencies in Canada even higher," it said, suggesting that impact will not be seen until next year but noting that there are already warning signs, such as increases in personal loan writeoffs, although not yet in mortgages.
It forecasts that personal bankruptcies will be up more than five per cent next year from two per cent this year, and that business bankruptcies will also rise to five per cent in 2008, from what was a two-per-cent increase during the first nine months of this year.
Investors, apparently, have also become increasingly worried about the outlook for the economy, sending Canada's benchmark stock index for a triple-digit loss on Friday, to cap what on balance was a losing week for markets.
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