After some glowing reviews from Moody’s (NYSE:MCO) and the Bank of Canada, it seems the country is poised to grow at rates faster than expected, but Morgan Stanley (NYSE:MS) says there are some very real risks Canada faces, and there’s no surety the increased estimate for growth in the country will become a reality.
Moody’s revised their forecast for Canadian growth from 2.7 percent to 3.2 percent, while Bank of Canada up their estimates for the Canadian economy from 2.9 percent to 3.7 percent in 2010. Moody’s looks for the same 3.7 percent, but in 2011.
The overall concern for all of this is the assumption concerning domestic and international growth, as the increased numbers take into account that’s going to be what drives the performance of Canada.
Breaking that down a little bit, that leads us to Canada’s largest trading partner, the United States. If US growth is stagnant, that will probably have a larger impact than anything else on the new optimism for growth.
In spite of the attempt to spin everything positively in the alleged recovery in America, the truth is the United States is far from any sustainable recovery, and you’re more tossing the dice with them as much as any other country in the world. But growth is definitely tied into the U.S. performance, and that’s no guarantee in 2010 or 2011.
That would of course hammer the exports and commodities markets which Canada relies upon so strongly. It’s also believed that business investment will lead America out of the recession and not the American consumer, meaning there are a lot of challenges there for the export market of Canada.
Another factor of exporters is the rise in value of the Canadian dollar, which creates a lot of challenges against their competitors, as that former advantage is all but gone now, and it is expected to stay that way for a long time.
Commodities will continue to be their usually volatile selves, although there is a solid argument that most will rise over the long term, which bodes well for Canada. That also presents inflationary concerns which could soften demand for that reason, which would in turn ultimately drive down prices.
But as far as it relates to short term projections, I think commodities could be a strong performer for Canadian companies, and could help some of these estimates be what actually happens for Canadian economic growth.
Oil and gas prices as they relate to Americans could blow up in the faces of Canadian companies, as if they go too high, the American consumer won’t pay the price, and demand will fall along with those prices.
Another area of concern is the very important tourism industry of Canada, which will suffer with their stronger dollar, which will really drive down revenue and profits.
For domestic growth, Morgan Stanley mentioned productivity is a real concern, as that has fallen in Canada over the last 10 years, and hasn’t shown signs of turning around. That could skew the growth numbers because capacity use would be weak, and even if the expected growth isn’t there, it could still increase inflation or the concern of inflation.
You could take many of these same things and apply them to any country of course. But in the end, there is a lot of optimism for Canadian growth, but there are an awful lot of things in the background which could happen to derail that optimism.
As Morgan Stanley said, this is very real risk and should be included in assessments about Canada, as it seems too many things are out there which need to go right in order for this growth to happen.
