US Economy Is Slowing: How Will It Affect Canada?
The unemployment rate in Canada went up last week. However, when you jump to 6.4% from 6.1% it is hardly earth shattering. The Canadian economy continues to hum along. With the Alaskan oil pipeline currently shut down, those oil dollars are rolling into Alberta. Our economic numbers should reflect that next month.
For the rest of us, far from Alberta’s tar sands we have to rely on our wits and the proximity to the US market. So as the US economy goes so does ours. Any burps from Ben Bernanke will cause ripples in Canada.
Those ripples may come from a weakening US economy. It surely is causing some concern for Federal Reserve chairman, Ben Bernanke. When will the constant rise in the fed rate stop? It’s the question many economists have in their mind as the fed meets this week.
Former federal reserve chairman Alan Greenspan and Ben Bernanke have raised the fed rate 17 times since June of 2004. It’s meant that borrowing costs in August 2006 are the highest in more than five years. Their goal is to slow the economy enough to prevent inflation from rising while not crimping economic activity so much that it puts the economy into a recession. It’s the same thing David Dodge; the Bank of Canada governor has to worry about.
These high borrowing costs have played a role in stifling American consumers’ appetite to spend and cooling the once hot housing market, factors that have dampened overall economic activity. American business has tightened their spending and slowed new hires.
The American economic growth rate is stuck at 2.5 to 3% in the second quarter of this year. That’s down from the 5.6% growth rate in the first quarter.
For Canadians this is very worrisome. Not all of us can live in Alberta. The rest of us are very dependent on exports into the United States. If their economy is slowing so are our exports. When will this economic fatigue show up in our economic numbers?
Remember the US-Canada trading relationship. It is the largest ever to exist between two nations. According to US government statistics two-way trade in goods and services between Canada and the United States during 2000 was estimated at approximately C$700 billion, or almost C$2.0 billion per day. Of Canada’s 2000 imports, 74 percent came from the U.S., while 86 percent of Canada’s total exports were shipped to the United States. The volume of Canada-U.S. trade in 2000 was far greater than the total amount of Canada’s trade with all of its other trading partners combined. In 2006 it is more so.
So as Canadians, we want a pleasant Ben Bernanke. No surprises would be good. No more credit tightening would be good. However, maybe we are on borrowed time. Inflation is rearing its ugly head in the US. For the first six months of this year, consumer prices have risen at an annual rate of 4.7 per cent. That’s faster than the 3.4 per cent increase registered for all of 2005. Add that problem at Prudhoe Bay Alaska into the mix and inflation becomes very real.
It is a balancing act. Raise rate too high and consumers stop borrowing money and the economy either slows down or in rare cases shrinks. Unemployment can rise. However, if you raise interest rates just at the right time, inflation and unemployment can be offset making the economy work well. The problem arises when something gets out of whack. I’m sure energy prices are surely challenging Bernanke’s resolve.
What’s also at work is the “lag time” between interest rate hikes and what actually is happening on the ground with inflation. Sure inflation has risen recently, but with 17 straight interest rate hikes some people might wonder what’s happening. So far these hikes haven’t calmed the nerves of inflation fighters. The effect of interest rate hikes is still “lagging” somewhere in the economy.
For Canadians currently enduring a very warm summer the thoughts of Bernanke’s possible interest rate rise is surely far away. However with high oil prices and a war in Iraq and problems in Israel, the Americans have their hands full. There economy could surely get off course. Any dalliance this way will surely have its affect on Canada.
Does this mean is the economic apocalypse coming? Hardly. Canada’s economy is so strong now; it almost makes me think nothing could affect it. However, as I said before, we don’t all live in Alberta. With over 80% of our exports going to the US, we should be interested in what Ben Bernanke does. If he slips up, the ripple effects will only get bigger when they hit our shores.