Wednesday, October 17, 2007

Cutting the Umbilical Cord: Canadians Are Now Getting Richer Than Americans

Canadians might have to wait a long time for an MRI or surgery (see post below), but the Canadian economy will outperform the U.S. economy in 2008, according to this report from CIBC World Markets, a leading Canadian investment bank. Highlights of the report:

1. By the end of next year Canadians will get as much as a nickel back when they trade their loonies for greenbacks, the biggest premium for the C$ since 1960 (CIBC's forecast is C$0.95/USD for 2008).

2. U.S. housing prices will continue to fall on mounting foreclosures, while Canadian housing prices continue to rise on a surging domestic economy.

3. For the fourth year in a row, the resource-based TSX Stock (Canada's benchmark stock index) is set to outperform the S&P500 (see top chart above, click to enlarge).

4. Across a wide spectrum of assets, the tables have suddenly turned. Canadians are getting richer compared to their American neighbours, after having fallen so far behind during the IT-driven economy of the 1990s.

5. At the heart of this reversal of fortune is the huge shift in the global terms of trade over the last decade, which has seen economic value-added migrate from information technology back to resource rents under the ground. Nowhere is that shift more evident than when comparing soaring crude oil prices against stagnant or plunging technology prices. It takes only a third as many barrels of oil to buy a basic computer as it did at the start of the decade (see chart above), when Silicon Valley drove the world economy.

6. Real GDP growth in Canada (forecast of 2.7%) will surpass the US in 2008 (1.9%).

7. Today it’s not Russian or Mexican defaults that de-stabilize global credit markets, but defaults by homeowners deep inside the American heartland. The American economy has gone from the global engine of growth to the world economy’s Achilles heel in the space of a decade.

8. With the developing world, not the US, now driving global resource demand, the umbilical cord that has always connected the Canadian economy to the much larger American market is being severed.


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