Olive: Offshore investors like Canada's prospects

The Northern Tiger is back, as a Canadian economic recovery more rapid and vibrant than forecast increasingly wins favour with offshore investors.

That term was coined by then-federal finance minister John Manley during the most recent Canadian boom, the likes of which most experts thought we wouldn't see again for many years after the devastating global economic meltdown of 2008-09.

Yet improbably, given continued Canadian export reliance on a weak U.S. economy, Canada is already on the mend. Canada has posted job gains in five of the past seven months. The loonie has soared to a 20-month high and is expected to break through its 2007 record of $1.10 (U.S.) this summer.

And in this next period of Canadian prosperity, there'll be no need for Canada-boosters such as Manley to tout Canada's favourable conditions to foreign investors.

Canada's attractive record in job creation, GDP growth and comparative fiscal strength is well known to foreign institutional investors and central banks, which have been snapping up the loonie, federal and provincial bonds and Canadian corporate debt securities.

You could call it "Canada's moment," a chapter in history that finds the Canadian economy outperforming expectations while major foreign economies are in distress.

Yes, we've been here before. Only three years ago the Canadian dollar peaked largely on the strength of a global commodities boom.

And, yes, the global financial crisis intervened, at a cost of 417,000 Canadian jobs lost between the labour-market peak of October 2008 and the beginnings of recovery in July of last year.

Yet, unlike most recessions, this downturn wasn't triggered by high interest rates and unmanageable public- and private-sector debt loads. Nor has Canada been recovering from the implosion of a record housing boom. In the U.S., home values have plummeted by between 40 per cent and 70 per cent. That in turn has dampened U.S. consumer spending, triggering the loss of more than eight million jobs since the beginning of the U.S. recession in December 2007.

Canada should have lost closer to 800,000 jobs in the recession – or double our actual job loss – if the usual 10 per cent rule is applied in Canada-U.S. comparisons. Instead, the Canadian labour market weakened later and less drastically than its U.S. counterpart. It has also recovered faster, creating 159,000 jobs in the past seven months, making for a current jobless rate of 8.2 per cent. Not until this month is the U.S. economy, with a 9.7 per cent unemployment rate, expected to begin creating net new jobs.

The absence of a northern housing boom-and-bust meant Canadians didn't suffer huge plunges in net worth tied up in their homes, which kept consumer spending relatively stable through the crisis.

Ottawa, meanwhile, was coming off 11 consecutive fiscal surpluses as the recession dawned, a model of budgetary restraint unmatched by its G8 peers. Like their counterparts in London, Washington, Beijing and Berlin, Ottawa policy-makers committed to deficit spending to stimulate an economic recovery, but they did so from a sounder fiscal position.

Which means Canada's closely watched deficit-to-GDP ratio will be a modest 4 per cent this year, according to the International Monetary Fund (IMF), dropping to 2 per cent next year. Kevin Page, the Parliamentary budget watchdog, sees the ratio falling to just 1 per cent in five years.

The next period of Canadian prosperity will be marked as much by sound public and private finances as by robust economic growth.

That makes Canada a safe haven for offshore investors seeking the upside of GDP growth without the risk of suffocating debt levels – the crisis now bedevilling the U.S., Britain and much of continental Europe.

The Canadian recovery is hardly without blemishes. Private-sector hiring continues to lag that of government. Productivity gains trail those of the U.S. The era of remarkably cheap money will soon end, as the Bank of Canada hikes its key lending rate from the current historic low of 0.25 per cent to 1.25 per cent by year's end.

Higher interest rates and a stronger loonie will be a challenge for export-sensitive industries.

Still, the balance of economic indicators weighs heavily in favour of a sustained economic recovery.

So much so that many offshore investors in Canadian currency and securities have happily exceeded the limit they normally apply to investments in any one country.

That might seem an imprudent strategy, and it would be, if a wager on Canada wasn't the bet on stability that foreign investors rightly regard it to be.

Wednesday: David Olive explains why the U.S. economy is in better shape than many people believe. dolive@thestar.ca