Financial Update

Economy showing signs that worst is already past: economists

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· Dollar -.15c to $ $99.57
· Oil -$1.58 to $124.22US per barrel
· Gold -$3.10US to $865.40US

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By Julian Beltrame, The Canadian Press

OTTAWA - The loonie once again worth about the same as the U.S. greenback, employment, exports and consumer spending continuing strong - what is happening to Canada's year of economic discontent?

Just as the Canadian and U.S. economies were expected to be at their gloomiest - falling into negative numbers or close to it in the second quarter - some economists are entertaining the notion that the worst may already be in the past.

"What's with the doom and gloom in Canada lately?" asked BMO deputy chief economist Doug Porter this week in a list of 10 reasons to feel good about the economy.

Among the categories - strong income growth and employment, no real credit crunch, rising equity prices, a surprising trade surplus and a healthy housing market.

"We know that bad news sells, but this is ridiculous," Porter said of the hand-wringing in face of the positives.

Even in the U.S. - which is the real threat to the Canadian economy in terms of falling exports - the news has not been as uniformly bad as most economists had been forecasting for months, and the talk that the U.S. had already dipped into recession has not been supported by the numbers.

Growth in the U.S. has been tepid at best at 0.6 per cent the past two quarters, but it has remained above the line. And while many had pointed to the second quarter as the time the American economy would cross the line, the early numbers are at best mixed.

This week saw another "surprise" when the U.S. Commerce Department reported retail sales had actually risen 0.2 per cent in April, or 0.5 per cent if auto sales are excluded.

Meanwhile financial markets, a key factor behind of the U.S. slump, are showing signs of normalizing, according to Federal Reserve chairman Ben Bernanke, although he stressed they are far from back to normal.

And the U.S. dollar continues to firm against most currencies except Canada, where the loonie is bucking the trend and slowly gaining on the greenback.

The Canadian and American dollars have been flirting with parity. On Wednesday, the loonie peaked above US$1 before falling to close at 99.57 cents U.S. on Wednesday, well up from the recent low of 97.61 cents on May 2.

That's not the best news for manufacturers, who prefer a weak dollar to make their exports cheaper in the U.S., but it will be welcome by Canadians who plan to cross the border for a summer vacation this year.

"The Canadian dollar will probably be stronger this summer than I thought it would be," said RBC currency strategist David Watt. "I think it will likely trade at around parity or just above over the next few months."

The big reason is oil trading at record highs near US$125 a barrel, but another is natural gas - which represents a bigger net Canadian export commodity than crude, and which has seen prices firm to above $10 per 1,000 cubic feet from about $7 at the end of 2007.

Global Insight economist Dale Orr cautions that while some signs have been encouraging, it is too early to break open the champagne.

It is now likely that the U.S. will avoid a classic recession defined as two quarters of contraction, although growth this quarter may dip into the negative side. But nobody should confuse that with a healthy economy, he added.

"Sure the U.S. economy is going to be picking up sharply from here to the end of the year, but that's probably going to be overwhelmingly because of the U.S. government fiscal rebates (about $600 per individual) that's worth about one per cent of gross domestic product," he explained.
"Now the real issue is, when we get to the first quarter of next year, are we going to be faced with weak fundamentals that take us back to almost zero growth or will all the monetary easing kick in to keep them afloat."

Another indicator of how the economies in Canada and the U.S. are faring comes Thursday when both countries report on the latest manufacturing activity, which is expected to show some growth in Canada.

A quicker than expected turnaround in U.S. growth and consumer spending would help Canadian exports to the country - the only real weakness in the Canadian economy, said Bank of Montreal economist Michael Gregory.

Yet he is not convinced the relatively good news means the U.S. or Canada are out of the woods.
"I don't know many people that can tell the difference between minus 0.5 per cent and plus 0.5 per cent growth, either way it feels bad," he pointed out.

But his colleague, Douglas Porter, would rather look at the glass as half full. He points out that economists have been too quick to accentuate the negative and even interpret good news - like last week's $5.5 billion trade surplus, the largest since last May - into bad by emphasizing that volumes of exports declined. "The glass is more than half-full in Canada and the global economy is in a lull in the middle of one of the greatest booms on record," he noted. So Canadians should stop "obsessing" about what he called a "temporary bout of cyclical weakness."