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Canada looking like Switzerland, economist says
'Some of the soundest fundamentals in the world'
Jacqueline Thorpe, Financial Post
Published: Friday, March 03, 2006
Forget suffering from "Dutch disease." Canada is thriving with "Swiss syndrome," an economist said yesterday.
Many analysts have warned Canada may be falling into the same trap that befell the Netherlands in the late 1950s when the discovery of North Sea gas sent the Dutch currency soaring and the manufacturing sector tumbling soon after.
But Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said Canada's economic fundamentals may be more in line with those of Switzerland, which is typically viewed as the gold-standard economic model with a massive current account surplus, a super-strong currency, rock-bottom unemployment, miniscule inflation and consistently low interest rates.
"Switzerland may have beaten Canada at its own game in the recent Olympic hockey tourney, but we are catching them at their game -- now boasting some of the soundest economic fundamentals in the world," Mr. Porter wrote in a report.
Canada can also point to some positives that Switzerland can't, including solid gross domestic product and a government budget surplus.
Raging commodity prices may have been a major factor driving the loonie to new peaks -- it reached a 14-year high of US88.50 cents yesterday as oil rebounded -- but Canada's dramatically improved fiscal and credit position should not be overlooked, Mr. Porter said.
Canada's overall government sector was in surplus to the tune of 1.7% of GDP, according to recent 2005 figures, the second-best annual performance on record dating back to the 1960s, trailing only the boom year of 2000.
While the government is set to loosen the purse strings this year, Canada should remain in surplus while Switzerland's deficit is expected to stay above 1% of GDP. "Perhaps Canada should aim for a standard possibly even higher than Switzerland, such as Norway, where the budget surplus is expected to clock in at a staggering 17% of GDP," Mr. Porter quips. "They're effectively like Alberta without the rest of the country."
Sliding government debt has combined with persistently low interest rates to chop Canada's foreign net liabilities to 12% of gross domestic product from more than 44% in 1994 and brought net interest and dividend payments on that debt to their lowest share of GDP in at least 40 years.
"The melting shortfall on net interest and dividend payments suggests that a virtuous circle is taking hold on the current account and thus the currency may in fact be poised for additional strength in the years ahead," Mr. Porter said.
In addition to reaching new highs against the U.S. dollar, the loonie also broke below $2 per British pound this week for the first time in more than a decade.
Mr. Porter said it is likely only a matter of time before Canada's foreign net liabilities shrink to zero and Canada joins Switzerland, Japan, Germany and Norway as net creditor nations. Perhaps then, the loonie could join the Swiss franc in having "safe-haven" status, acting as a port of call in times of global distress, especially with Canada one of the few geopolitically stable countries exporting oil.
Canada's manufacturing sector will likely continue suffering some element of Dutch disease, Mr. Porter said.
"Beyond bragging rights and a triple-A credit rating, the real economic payoff from very healthy economic fundamentals is found in rising living standards flowing from a deservedly strong currency and low long-term borrowing costs," he added.
Canada looking like Switzerland, economist says
'Some of the soundest fundamentals in the world'
Jacqueline Thorpe, Financial Post
Published: Friday, March 03, 2006
Forget suffering from "Dutch disease." Canada is thriving with "Swiss syndrome," an economist said yesterday.
Many analysts have warned Canada may be falling into the same trap that befell the Netherlands in the late 1950s when the discovery of North Sea gas sent the Dutch currency soaring and the manufacturing sector tumbling soon after.
But Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said Canada's economic fundamentals may be more in line with those of Switzerland, which is typically viewed as the gold-standard economic model with a massive current account surplus, a super-strong currency, rock-bottom unemployment, miniscule inflation and consistently low interest rates.
"Switzerland may have beaten Canada at its own game in the recent Olympic hockey tourney, but we are catching them at their game -- now boasting some of the soundest economic fundamentals in the world," Mr. Porter wrote in a report.
Canada can also point to some positives that Switzerland can't, including solid gross domestic product and a government budget surplus.
Raging commodity prices may have been a major factor driving the loonie to new peaks -- it reached a 14-year high of US88.50 cents yesterday as oil rebounded -- but Canada's dramatically improved fiscal and credit position should not be overlooked, Mr. Porter said.
Canada's overall government sector was in surplus to the tune of 1.7% of GDP, according to recent 2005 figures, the second-best annual performance on record dating back to the 1960s, trailing only the boom year of 2000.
While the government is set to loosen the purse strings this year, Canada should remain in surplus while Switzerland's deficit is expected to stay above 1% of GDP. "Perhaps Canada should aim for a standard possibly even higher than Switzerland, such as Norway, where the budget surplus is expected to clock in at a staggering 17% of GDP," Mr. Porter quips. "They're effectively like Alberta without the rest of the country."
Sliding government debt has combined with persistently low interest rates to chop Canada's foreign net liabilities to 12% of gross domestic product from more than 44% in 1994 and brought net interest and dividend payments on that debt to their lowest share of GDP in at least 40 years.
"The melting shortfall on net interest and dividend payments suggests that a virtuous circle is taking hold on the current account and thus the currency may in fact be poised for additional strength in the years ahead," Mr. Porter said.
In addition to reaching new highs against the U.S. dollar, the loonie also broke below $2 per British pound this week for the first time in more than a decade.
Mr. Porter said it is likely only a matter of time before Canada's foreign net liabilities shrink to zero and Canada joins Switzerland, Japan, Germany and Norway as net creditor nations. Perhaps then, the loonie could join the Swiss franc in having "safe-haven" status, acting as a port of call in times of global distress, especially with Canada one of the few geopolitically stable countries exporting oil.
Canada's manufacturing sector will likely continue suffering some element of Dutch disease, Mr. Porter said.
"Beyond bragging rights and a triple-A credit rating, the real economic payoff from very healthy economic fundamentals is found in rising living standards flowing from a deservedly strong currency and low long-term borrowing costs," he added.