Canadian Revival, Inflation, and Competitiveness

September 17, 2009

Growth prospects are brightening.  A 1.1% advance in Canada’s index of leading economic indicators last month was the biggest increase in 88 months and followed a rise of 0.6% in July, no change in either May or June and a 0.9% drop in April. In the two months between May and July, factory sales and orders leaped by 7.8% and 14.2%, while inventories fell 2.3%.  A 0.16 point drop of the inventory-to-sales ratio to 1.48 shows progress being made in getting excess inventories off the shelves, a hopeful sign for future production.

The 12-month pace of total and core Canadian CPI inflation in August was minus 0.8% and plus 1.6%, which compare with minus 1.5% and plus 1.4% in the United States.  Over the six months since February, inflation has been lower in Canada at 0.0% total and 1.8% core than in the United States.  However, Canadian labor productivity continues to lag substantially behind its southern neighbor.  Canadian productivity was unchanged in 2Q09 from the first quarter and from the second quarter of 2008, whereas U.S. productivity went up by 1.6% in the quarter and 1.9% from a year earlier.  When the Canadian dollar is rising, the chronic productivity gap produces a huge disadvantage in production costs per man-hour, or what economists call unit labor cost trends.  Converted to U.S. dollar terms, Canadian unit labor costs soared 7.0% in the second quarter, while U.S. unit labor costs fell by 1.5%.  That disparity, in turn, puts the price competitiveness of Canadian exports and import-competing goods at a disadvantage.

The Canadian dollar is presently 9.4% stronger against its U.S. counterpart than its mid-2009 level.  That appreciation is more than twice as much as the net 4.6% advance during the first half of this year. While the Canada benefits from the rise of world commodity prices, the drag from the loonie’s appreciation has more than outweighed the benefit from the rise in commodity prices.  Canada is reviving because of additional support from monetary and fiscal stimulus and a healthier world economy.  So far, authorities have shunned currency market intervention or quantitative easing.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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