1 May 2008

Strong dollar nibbles away at GDP

The following article is excerpted from the 1 May 2008 edition of “globeandmail.com”.

Canada's commodity boom isn't enough any more.

Energy and other commodities are commanding ever higher prices, but not even oil is offsetting the damage to the Canadian economy wrought by deteriorating manufacturing and trade conditions or the storms battering financial and other services, the latest Statistics Canada numbers show.

The economy unexpectedly shrank in February, providing a glimpse of what's in store in the months ahead: little or no growth.

Canada is battling long-festering problems exposed by a strong currency, the slow U.S. economy and a global credit squeeze that has spilled over the border and made financial institutions more reluctant to lend and consumers and businesses more cautious about borrowing….

By contrast, the U.S. economy, which was expected to be mired in another recession, managed to eke out a feeble gain of 0.6 per cent in the first three months of this year, mainly because of a surge in inventory investment and a weaker currency that bolstered exports - the exact opposite of what has been occurring in Canada.

"It's the currency catching up to us," said Peter Dungan, economics professor at the University of Toronto's Rotman school of business.

The weakened greenback has helped the U.S. export sector to flourish.

Conversely, Canada, especially Ontario, is watching exports get hammered by a strong Canadian dollar in the midst of a global economic slowdown….

But now, Canadian exports made more expensive by the stronger loonie are no longer in high demand south of the border. The slack is directly aimed at many of the products Ontario makes.

"The crunch is happening in the stuff we supply," Mr. Dungan said.

It wasn't expected to happen this way. The U.S. economy was predicted to be contracting by now in the wake of the collapse of the domestic credit bubble, a major financial crisis and a rapidly deteriorating h