How long can Canada remain as a stable economy in a global storm?

While the rest of the world economy slumps, Canada’s jobless rate has declined to the lowest level since December 2008. Even better news: The quality of jobs in Canada is improving. Canadians are moving from part-time to full-time work, and from public-sector to privatesector work. But now the frightening question: How long can Canada remain an island of comparative stability and prosperity in a global storm?
Just one example: Canada increased its exports by $26.7-billion in 2010 over 2009. Almost 80% of that increase was driven by sales of automotive products into the U.S. market.
Canada’s economy has been buoyed by strong prices for Canadian energy and food exports, and by a surge in construction activity inside Canada. Canada benefited from a well-designed fiscal stimulus – very unlike the American version – that supported the economy in the crisis and then ended when its job was done.
So congratulations all around. Yet even as Canadians enjoy their comparative success, it sadly remains true: The most important factors determining Canada’s future success remain outside Canadian control.
If the U.S. economy slips back into recession, what happens to U.S. car sales? What happens to Canadian automotive exports? The answers are obvious – and grim.
Canadians have relied more and more on China, not only as a market, but also as a source of capital. The condo boom in Toronto looks increasingly speculative and the money fueling the speculation is increasingly Chinese. The Chinese government keeps murmuring about the need to slow inflation inside China by raising Chinese interest rates. If China follows through, the flow of Chinese money into Canada would slow. What then happens to the Canadian building boom?
Canadian food sales, Canadian energy prices: all set by world markets. Even hopes for an increase in Canadian oil sands exports depend on U.S. approval of a second oil pipeline.
With a few big exceptions (cough, Dalton McGuinty, cough), Canadian governments have been getting the big decisions right at a very tough time.
But Canadian decision making counts for only so much. Canada is a $1trillion economy in a $60-trillion world – and a world where the bigger countries seem determined to get their big decisions wrong.
Canadians watched horror-struck and helpless as the U.S. Congress walked up to the edge of defaulting on its obligations – many of them owed to Canadians. Even if interest on U.S. government bonds continued to be paid, many Canadian companies have contracts with the U.S. government – and those would have all been called into question.
Perhaps more threatening than the spectacle across the border is the gathering crisis across the Atlantic in the eurozone.
Canadians need to worry about two potential outcomes of the crisis.
Scary outcome No. 1: Europe’s less competitive and more indebted countries – Greece, Spain and Italy – reschedule their debts, maybe even quit the euro currency altogether. That means another round of international bank crises. As the joke goes: While American banks were too big to fail, Germany’s banks may be too big to save.
Scary outcome No. 2: Europe’s stronger economies – Germany, France and maybe the U.K. – accept responsibility for the debts of the weak economies in return for greater control over the weak countries’ finances. In this scenario, France and Germany and maybe the U.K. will have to raise taxes at home and cut spending more in order to finance their additional debt. That means more austerity in Europe, and less buying by European customers.

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