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At Issue

With Philip Shaw

Changing US Economic Fortunes Will Have a Big Effect Here

Tuesday, June 17, 2003

The events of the last few months have thrown a wrench into the inner gears of popular economic thinking. In Canada, before SARS and Mad Cow hit, we had been lulled to sleep by our impressive economic numbers. We had low inflation, a rising dollar, relatively low interest rates and economic growth numbers, which were stunning in their consistency. With SARS and Mad Cow still with us, many economists are still arguing that our growth numbers can be sustained.
So when David Dodge, the Bank of Canada governor got up in front of a Montreal business group last Thursday, many of us economic types were hanging onto our chairs. Dodge said that SARS was hurting tourism not only in Toronto, but in many regions of the country. Beef exports have obviously dried up and the economic fallout was hurting growth. The 17% rise in the value of the Canadian dollar has certainly put a strain on the growth of the Canadian economy.
Dodge said, "The magnitude and speed of the Canadian dollar's rise has been greater than anyone anticipated and will have a dampening influence on aggregate demand later this year and next." If that doesn't sound like a man covering his bases, I don't know what it says. I think he's back peddling, looking for a way out of previous rosy projections.
During the 12 months, the bank had been raising rates by quarter-point increments in an effort to cool growth just enough to avoid inflation. Its main policy interest rate now stands at 3.25 per cent - fully two percentage points above the same rate in the United States, where federal reserve is said to be thinking about lowering its 1.25 per cent policy rate further. Some analysts say that will be 25 to 50 basis points down to .75 to 1.0%. Clearly, deflation has them spooked.
But, on the other hand, maybe the fat lady is singing. Maybe the Americans are finally getting out of the economic soup they've found themselves in since 911. The US economy is being boosted by these lower interest rates, a weaker currency and if you believe President Bush, his tax cuts. The stock market has had double-digit gains. The White House, Congress and the fed are all working to make the economy hum into an election year. Short of another terrorist strike, they might be on the way back, big time.
How this will affect us in Chatham-Kent will be the million-dollar question. As a rule, I always take low interest rates, good economic growth numbers and a low dollar. At the same time, our biggest friend and competitor, the US has the same type of advantages. Clearly, it will make their products more appealing for export to far off places like China and south Asia.
With this as a backdrop, the stock market is rising. Last Monday, the Dow Jones industrial average scored its biggest gains in two months climbing nearly 2%. The NASDAQ Stock market index also had its best day in three weeks going up 2.5%. This certainly doesn't qualify as a trend compared to the past meltdown, but folks with mutual funds surely are breathing a little sigh of relief.
Of course we always have a little political intrigue to stir up the economic waters. The biggest farce since Bre-X is playing out in the Liberal party. The leadership race or er, coronation of Paul Martin continued last week, with the last public debate in Quebec City. When Martin becomes Prime Minister, next February, I'm sure you will see a new tilt toward the Americans. The run up to that should provide its share of interesting moments.
So at the end of the day, it looks like we have a still healthy Canadian economy followed by an American economy poised to break out. That happy occurrence can only bode well for folks here in Chatham-Kent. But it’s a little too late for the folks at the Navistar truck plant. With governments backing away and the company fixated on points south, that workplace will probably be closed forever.
I haven't even mentioned the loonie. Its soaring behaviour is becoming so commonplace, it's hardly worth a mention. Combine that with future interest rates around 2% and our whole economic mindset is challenged. In the next few months, it'll be intriguing to see just where this economy is going.



Philip Shaw, farms 830 acres near Dresden, Ontario. He holds a Masters of Agricultural Economics and Business Degree from the University of Guelph and is a well-known commentator on agricultural issues in print, on radio and over satellite in Canada and the United States. In the Chatham-Kent Times, Phil will use his frank and forthright writing style to address political and economic issues from the local to the international stage. He is a keen observer of political life at all levels, reads widely and has travelled the world to gather fodder for his column. See what's At Issue this week.