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U.S. revival good news for Canadian economy

Logs to be processed at Interfor’s mill in Delta, B.C.

DARRYL DYCK/The Globe and Mail

Three-quarters of Canadian exports flow to the United States, so any pickup in demand in the world's largest economy will ripple through to this country – indeed, through the whole global economy.

The brighter picture is particularly good for Canada, with U.S. demand perking up precisely in the sectors this country supplies, such as housing, industrial equipment and autos, says Craig Wright, chief economist at Royal Bank of Canada. "The good news is ... those areas in the U.S. that Canada exports to are doing quite well."

It's good timing. The domestic side of the Canadian economy is wavering as house prices deflate and debt-laden consumers pare spending. Growth next year will require support from international trade. Here are several ways a firmer U.S. economy will boost Canada.

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It's a reversal of fortune. Canada's forestry exports – two-thirds of which go to the U.S. – are expected to climb 12 per cent next year after a decline this year and flat shipments in 2011, Export Development Canada's chief economist Peter Hall predicts. That would make the biggest increase in nine years.

A sustained increase in U.S. housing activity will boost the appetite for building materials, including lumber. Lumber exports alone are set to jump 29 per cent, EDC says, driven by an expected 40-per-cent rise in U.S. housing starts next year.

Activity is already revving up. In British Columbia, the rate at which sawmills are ramping up production is now outpacing the rate at which they're closing down by a factor of two to one, EDC's analysis shows.

"My worry is the U.S. housing market will come back so quickly that we can't actually bring capacity on quickly enough."

Indeed, the lumber sector is a "bright light" in the economy right now, Finance Minister Jim Flaherty said last month. With the U.S. housing market "finally showing some signs of life ... this is very good for the Canadian economy, especially the lumber business."


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Auto production in Ontario has revved back to pre-recession highs, RBC's Mr. Wright says.

Canadian auto production jumped 20 per cent in the first eight months of this year, due in large part to U.S. consumers, the Conference Board of Canada said this week. It expects motor vehicle makers to post their biggest profits this year in a decade.

"The industry will continue to benefit from brisk growth in vehicle sales, both this year and next," the board said. "Increasing U.S. demand is expected to lead to a prolonged recovery in Canadian auto exports."


It's not just oil, canola and timber that will flow across the border. Machinery and equipment will too.

Exports of capital equipment already rose about 13 per cent this year, and are poised to climb another 8 per cent next year, according to EDC.

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A burst of spending by U.S. companies, which have been sitting on cash and are now poised to re-invest, is the chief reason. The surge "that is going to come out of the U.S. cash stash will fuel U.S. spending on machinery and equipment," said EDC's Mr. Hall.

That, in turn, lifts prospects for tool-and-die makers in southwestern Ontario – in places like Windsor, London and the Toronto area that were badly hurt by a drop in U.S. demand during the recession.

Consumer confidence

Better prospects in the United States bode well for Canadian sentiment. A stabilizing U.S. economy tends to make employers more willing to hire, and give consumers more security to spend.

An index of consumer confidence this week showed Canadian optimism about the economy right now rose to a four-year high.

"This is a clear indicator that Canadians are translating the Obama win (which a high percentage of Canadians favoured) into feeling good about the economy," according to TNS, the survey firm that conducted the monthly poll.

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More


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