At the end of 2008, with the global economy crumbling and forecasters trying to out-gloom each other with dire predictions of blood in the streets, Linda Hasenfratz was understandably anxious. As CEO of Linamar Corp., one of Canada’s largest auto-parts suppliers, she watched as GM and Chrysler, two of her biggest customers, careened toward bankruptcy. Meanwhile, analysts were warning investors that Linamar might breach the terms of its loan agreements. Shares of the Guelph, Ont.-based company plunged to $3.50, a depth not seen in nearly two decades. But rather than panic, Hasenfratz did what precious few people seemed capable of at the time. She stepped back and took a deep breath.
The auto sector was in serious trouble, she acknowledged, but car sales had fallen to “drastically, unbelievably unrealistic, totally unsustainable low” levels. And Linamar wasn’t about to go under, even if the Detroit giants went bust. “I knew it wouldn’t kill us,” she says. So in the darkest days of the credit-crunch-cum-financial-crisis-cum-Great Recession, Hasenfratz dipped into her family’s finances and bought a million Linamar shares, a resounding vote of confidence in the business and the economy as a whole.
What Hasenfratz was betting on, and what even the most pessimistic forecasters admitted would one day come, was a recovery. But who could have thought the rebound would be as quick and robust as this. Barely a year after stock markets looked like they were headed for a long-term rout, exchanges in New York and Toronto have leapt roughly 70 per cent. More importantly, most signs point to the recession having ended sometime last fall. In the fourth quarter the Canadian economy grew by five per cent, soundly beating expectations. So while Hasenfratz finds herself still bracing for a tough slog in the auto sector—the crucial American car buyer could take years to fully recover—she’s once again focused on the future and expanding her company into Europe and Asia. As for those Linamar shares she snapped up when the recession looked like it would last forever, “they’re about six times higher now,” she says, “but who’s counting?”
So much for the Great Recession, at least as far as Canada is concerned. When one adds up the evidence of this country’s remarkable economic recovery, the sum is nothing short of astounding. The job market is bouncing back. Last week, Statistics Canada said 20,900 new jobs were created in February, helping to drive Canada’s 8.9 per cent unemployment rate down a notch to a 10-month low of 8.8 per cent. The federal budget drew plenty of criticism from Canadians concerned about rising deficits, but compared to the sovereign debt crises playing out in Greece, Spain and Ireland, not to mention Washington’s exploding debt levels, Ottawa remains the poster child for fiscal austerity. The housing market has largely shrugged off the downturn—after a modest correction, national house prices in December exceeded the pre-recession peak reached in August 2008, according to the Teranet-National Bank House Price Index. Meanwhile, demand from Asia for Canada’s oil, gas, lumber and minerals is firming up. In a recent report listing reasons to “buy” Canada, Scotiabank economist Derek Holt called the country “the northern tiger.”
It’s not that the U.S. hasn’t staged a recovery of its own. During the fourth quarter, the American economy actually grew faster than Canada’s, at 5.9 per cent. But a large part of that growth, fully two-thirds, was the result of statistical adjustments on paper. Since U.S. companies aren’t slashing their inventories as fast as they were before, that translates into “growth” when calculating GDP. Despite the trillions of dollars of stimulus pumped into the U.S. economy by Washington and the U.S. Federal Reserve, the fact is American consumers and businesses still aren’t buying or producing much more of anything. Canada’s recovery, on the other hand, is very real, and its pace is picking up.
Canada’s rapid rebound out of the recession has a lot to do with how much better off we were going in. Our housing market avoided many of the worst excesses that plagued the U.S., such as subprime mortgages. Canada’s banks were more stable due to both tighter rules on how much debt they could carry, as well as a more conservative approach to risk. Government balance sheets were also better off thanks to years of difficult cost-cutting measures in the 1990s. Nonetheless, when the financial crisis hit, and Wall Street banks started falling like dominoes, businesses and consumers here ran for cover. But the fears were overdone, says Craig Wright, chief economist at RBC. “As people have come to realize, this wasn’t either a Great Depression or Great Recession—you’ve seen confidence pick up quite dramatically,” he says. “We used to talk about the Canadian economy being a well-kept secret, but the secret is getting out.”
Investors around the world are certainly taking note. In November, Russia’s central bank announced it would replace some of its U.S. dollar reserves with Canadian currency. Last year, foreign investors sunk a record $109.4 billion into Canadian bonds and equities. Most telling of all, the Canadian dollar is nearly back on an even keel with the greenback. With the Canadian dollar surging past the US98-cent mark, predictions of parity by this summer already look overly conservative. “The Canadian story is not usually one that’s at the forefront of international investors’ minds,” says Jim Barrineau, a senior economist at AllianceBernstein in New York who covers Canada. “As the sovereign debt story gets better understood by the average investor, people are gaining an appreciation for Canada, not just as a play on commodities, but as a play on a solid fiscal story coupled with pretty good growth prospects.” And it’s a story Barrineau expects will play out for at least the next five years.
All of this attention no doubt comes as a surprise for many Canadians. For years we’ve been focused on all the shortcomings of our economy, such as low productivity, lagging income growth and an uncompetitive tax regime. When Scotiabank’s economist described Canada as a “northern tiger,” he was actually using a term coined exactly 10 years ago next month amid a bout of economic soul searching. The Business Council on National Issues, which later became the Canadian Council of Chief Executives, issued a report entitled, “Global champion or falling star.” The hand-wringing message in the report was stark: other, more competitive nations, like the U.S., the U.K., Germany and Ireland, were leaving Canada behind. “We need to be a northern tiger,” the council’s CEO Thomas d’Aquino said at the time. “But instead we are losing critical mass—corporate headquarters and skilled people are leaving. If we don’t move quickly to turn the situation around, it won’t be long before this country is just a worse-off northern suburb of the U.S.A.”
As it happened, the situation did turn around. It helped that Canada sits atop some of the richest stores of natural resources in the world, at a time when everyone else suddenly became hungry for them. As a result, over the last five years of the commodity boom, Canadians have seen their disposable incomes grow at twice the rate as in America. But as economists point out, there’s more to Canada’s resilience than just geographic luck of the draw. By 2012, Canada’s corporate tax regime will be more competitive than most other developed countries, including the U.S. Years of belt-tightening have also given Ottawa more room to manoeuvre now. Even though federal stimulus spending is expected to push Canada’s debt-to-GDP ratio to 35.5 per cent next year, that’s still a far cry from the 60 per cent average plaguing the rest of the G7 countries. Now, at a time when many countries face pressures to hike taxes and become more protective, Ottawa has announced plans to remove all tariffs on machinery imports, lift restrictions on foreign venture capital investors, and has hinted at scrapping foreign ownership rules in the telecommunications sector. Wright at RBC says Canada still has a long way to go to boost productivity levels, but that’s nothing compared to mammoth problems facing other countries.
Canada isn’t free and clear of the recession yet. Nearly half a million jobs were lost during the downturn, many in the manufacturing sector, and it will take time to undo that damage. Canadian households are struggling under heavy debt loads. Meanwhile, the country’s fortunes are heavily dependent on a continued rebound in China and the rest of Asia.
So before we gloat too loudly about how much better off we are, perhaps it’s a good idea to recall the fate of that other tiger, the Celtic one. During the 1990s, the Irish economic miracle made the Emerald Isle the envy of the world. Yet much of the Celtic Tiger miracle turned out to be a mirage fuelled by cheap money and overspending. Now the country is suffering under a mountain of debt and spiralling unemployment. Canada doesn’t have to worry about suffering such a fate, but the lesson is still clear. History has shown that when a country believes too strongly in its own exceptionalism, and forgets to live within its means, the economy has a way of crashing back to reality.