Thomas Dalzell: What are the main factors underlying the weak Canadian dollar vs U.S. dollar. I am thinking not only of the last three points of drop, but the plummet from parity with the U.S. dollar.
Sherry Cooper: The Canadian dollar has been in long-term decline since 1975 for many reasons. Most fundamentally, our economy has dramatically underperformed the U.S. since that time. Productivity growth,in particular, has been quite disappointing. More recently, the flow of capital has been to the U.S. Even with a stellar performance in our stock market, most of the record inflow of foreign capital to our stock market has been transacted through U.S. exchanges, not through the TSE. Moreover, Canadian residents are sending a record volume of capital outside the country, mainly to the U.S. Finally, foreigners have been huge net sellers of Canadian bonds this year–for the first time since 1955–because our interest rates have been consistently below the U.S..
Karen: What’s your prediction for the next year? Will Canada outperform the U.S.?
Sherry Cooper: In order for us to compete on an equal footing with the U.S., we must do a number of things to improve our competitiveness. Firstly, tax rates must be at parity with the U.S. for personal income, corporate income and capital gains. We are making meaningful strides in that direction, but more must be done. In addition, financial capital availability must be enhanced. Our venture capital market is much less mature than in the States and our banks are more reticent to take risk, particularly on start-ups. Labour shortages are also a big issue. We need to train an dramatically increasing numbers of engineers and computer scientists, programmers, web site designers, etc. Business must work with the universities and colleges in this regard. Managerial talent in high tech is also insufficient, which means we must be able to attract talent from the U.S. and elsewhere. Innovation has to be rewarded. The tides have turned in our favour, but more needs to be done. Infrastructure to support the Web-driven world is also a must.
FORUM ON THE FUTUREHow High Can It Fly?A Time panel of experts ponders the future of Canada’s soaring economy and the best ways to face global competition Editor George Russell introduces the TIME Canada Economic Forum issue
Sherry Cooper: Uncertainty is never good for financial markets or for the economy. The U.S. economy was already slowing even before the Presidential stalemate. Depending on how long this goes on, a large number of decisions, both financial and economic, will be postponed. In any event, either candidate will not be seen to have a strong mandate. Bold, sweeping policy changes will not happen now with the Congress so evenly divided. That may be a good thing in the long run. But for now, volatility and loss of confidence can’t help but spill into Canada as well.
Gary: Dr. Cooper, how significant do you see the “CNBC effect” on US stock performance and market performance? If US cheerleading is a factor, how can Canada respond to it? Would it be hard to get air time for you on CNBC? You would be great on it! (-:
Sherry Cooper: All of the financial news networks–CNBC, CNNfn, Bloomberg, etc–have markedly increased public awareness of things financial. There is a good deal of cheerleading, but there is also the opposite–a lot of hype of so-called disappointing results that often exaggerate the effect. I don’t think there is anything we could or should do about it. The information-driven economy is upon us and that will never change. We are all news junkies now. I have been on CNBC and the other stations in the U.S. and Canada many times. Thanks very much for your support, I really like doing the tv spots, as time permits.
Caroline: What do you expect will happen to interest rates in Canada over the next few years?
Sherry Cooper: In general, I believe that inflation will remain muted and global economic activity will slow. This, in combination with continued debt reduction will bring interest rates down on balance. The Federal Reserve has stopped tightening monetary policy and their next move could be to lower rates, although probably not until the second half of next year. The Bank of Canada’s next move will depend on the dollar. If it falls too much further, they may feel compelled to raise rates, at least temporarily. This, obviously, would not be good for the economy.
Sherry Cooper: We can’t stop them, nor should we. It is a free, global marketplace and it is great for our young people to be sought after with tremendous opportunities. The only way to stem the brain drain is to provide tremendous opportunity here in Canada too. That means more growth, which will create more and better paying jobs.
Sylvain: What sectors should we be investing in for the next 2 or 3 years to get a more stable and secure investment?
Sherry Cooper: Safe havens over the next two to three years are likely to be financial services stocks, pipelines, health care and merchandising as well as the defense stocks in the U.S. Also, the government bond market provides attractive and less risky returns. Energy-related stocks will likely continue to do well over the next year.
Tom Broen: Do you think that linking the Cdn dollar to the US one, say at 75 cents using a currency board would be a good idea? I worry that the falling dollar has put us in a vicious circle vis a vis productivity growth.
Sherry Cooper: The falling dollar has put us in a vicious circle, but there appears to be no political will to address it. The government thinks it is a good thing because it makes our exports more competitive and most economists think a floating exchange rate is a necessary cushion. My concern is that our currency does not float, it sinks! Setting the dollar at 75 cents, however, would mean a stringent tightening of monetary conditions. There appears to be no support for such action. So, in the meantime, we will continue to see an erosion in the value of the money we earn, invest and spend. This is a national pay cut, particularly onerous for retirees on a fixed income.
john bonnick: what will be the effect on the canadian economy if -gore wins and b-if bush wins.
Sherry Cooper: A Gore vs. Bush win will have only a modest effect on the Canadian economy because the Fed will offset any substantial move to fiscal ease in either case. This is especially true given how narrow the mandate is. The Congress is nearly evenly split, so either President will find it impossible to make sweeping changes. Forget their grandiose election promises, therefore, the status quo of gridlock will likely prevail.
Sherry Cooper: Oil prices have surged from $10/barrel to over $33 since the end of 1998 with little meaningful effect on the economy. Oil prices may move higher this winter if we are faced with a significant cold spell, but oil just isn’t as important as it once was. As a percent of GDP, oil usage has declined 50% in the past 20 years in the U.S. Energy is not as large a share of the household pocketbook as it used to be either. The rise in prices, however, has increased headline inflation. Core inflation is still a modest 2.6% in the U.S. and a mere 1.3% in Canada. No worry there. If anything, rising heating bills will slow the growth of discretionary income and contribute to the slowdown in economic activity. This does reduce profit margins for many companies and, of course, improve the profit growth in the energy sector.
Sherry Cooper: The reason is more to do with catch up. Our basic industries are still doing well, while they have already slowed in the U.S. We are a net exporter of oil and gas, while the U.S. is a net importer.Our economic generally lags the U.S., our stock market has outperformed and our dollar has fallen, which does spur tourism and exports. This won’t last for long, however. If the U.S. continues to decelerate, so will we.
DTC: What effects do you see the upcoming Canadian federal election having on the economy?
Sherry Cooper: It is generally believed that the Liberals will win again, and most likely a majority government if the polls are to be believed. Even if they don’t, however, the Alliance and the Liberals are calling for meaningful tax cuts. That is great news for the economy. I expect Canadian growth to remain strong–3.6% next year.
Ali G: Do you think that cutting taxes is a good way to boost the economy?
Sherry Cooper: Absolutely. Tax cuts spur growth, increase entrepreneurial spirit and make us more competitive. The tax cuts also enhance productivity, so they are not inflationary. We still have a way to go to close the tax gap relative to our most important competitors. The beauty is, tax cuts generate more tax revenue, thanks to enhanced growth. That way, the pie gets bigger and everyone gets a bigger slice. They do not mean that the social safety net must shrink.
George: I am in my late 20’s and I have participated in many discussions regarding my pension. The arguments are, don’t rely on the C.P.P. when I retire but plan a strong RRSP account to live off of. What will be the state of the Canadian Pension Plan in 30 years?
Sherry Cooper: Probably ok, but even so, the payments are relatively small. Many people can’t afford to live on CPP alone, so save your money.
DTC: Do you think that the internet has effected the economy in a positive or negative way?
Sherry Cooper: Positive, of course. The Net has accounted for more than one-third of all the growth in the U.S. and Canada since 1995. It has created jobs, boosted productivity and markedly reduced the costs of production and communication. What’s more, we are in the early days of this revolution. The mobile Net is emerging as the Internet goes wireless.
Charles DeLand: Should the Bank of Canada worry about headline inflation at all (higher lately because of high oil and gas prices) or continue to focus on the core number?
Sherry Cooper: No, the core number is key and it is extremely low–only 1.3%.
Sherry Cooper: The volatility in the stock market is without precedent. You are quite right, the market seems to be looking for bad news, exaggerating it when they find it. That is what we saw with Cisco this week. My view is that tech stocks were priced for perfection and now the markets are reassessing the risk. This is a big point, because the multiples on these stocks (the P/E ratios) were so high, that the slightest disappointment can have a big effect. For so long, they could do no wrong. Now they can do no right. This too will change, but or the moment, expect huge volatility. The correction in techs is not over yet.
In the first year of the new millennium, Canada has blasted ahead like an economic ballistic missile, targeted on a new era of stellar good times. Economic growth for the 12 months that ended in August hit 4.4% (it’s currently expected to reach 4.7% for the year 2000); the national unemployment rate had fallen to 6.6% by June; and inflation, the toxin most likely to kill off long-term growth, was a manageable 2.7% for the 12 months that ended in September. Next year promises more of the same: growth of 3.5% (higher than projected for the powerhouse U.S.), unemployment that dips to 6.3%, and inflation only marginally higher than now.
Finally, after years of fiscal pain, there seems to be money to burn–at least during election time. The slender Liberal Party platform Red Book unveiled by Prime Minister Jean Chretien last week may have been short on new ideas, but it significantly untied the purse strings. Along with calling for $4.3 billion in additional federal spending over the next four years, it affirmed the government’s intention, if re-elected, to cut capital-gains and income taxes to the tune of $65 billion over the next five years while continuing to retire the national debt. If a Canadian Alliance government emerged (last week that looked unlikely, with the party’s support at 29%, vs. the Liberals’ 42%), taxpayers could expect even more largesse. Meanwhile, budget surpluses seem to stretch as far as a Treasury Board official’s eye can see.
As if any more proof were needed that Canada has become one of the world’s most export-oriented nations, its sales of goods and services abroad were also on a spectacular trajectory. Exports for the first eight months of the year grew 15.7%, compared with the same period in 1999, and exports as of June made up 45.5% of gross domestic product, vs. 42.3% a year earlier. In the process, trade ties with the U.S. grew even stronger: exports to the U.S. through August of this year were 15.8% higher than the same period last year, making up 86% of Canada’s total.
Could anything get any better than this? More important, could it get worse? What steps should the country be taking to guarantee its prosperity and place in the budding new century? As the political parties sketched in their opposing plans and policies, TIME last week convened a special panel of economic experts from Europe, Asia, Canada and the U.S. to consider Canada’s domestic and international prospects in the months and years ahead. Our Forum on Canada’s Future was convened in TIME’s Toronto offices; for 3 1/2 hours the five members of the panel debated short-term issues raised in the campaign battle and a long-term agenda for the fiercely competitive era that they are convinced is inevitable. On one point the panel was unanimous: there is no room for complacency in the tough global environment that looms after the political skirmishing is over. Among the highlights of the deliberations:
? Canada has made a “fantastic improvement,” in the words of Kenneth Courtis, vice chairman for Asia at the Goldman Sachs investment firm, in the economic fundamentals that put it gravely at risk in the early 1990s. And the latest promises to cut income and capital-gains taxes are a further step in an agenda of reform that can improve the country’s international competitiveness. In that sense, Canada may have reached some kind of watershed. But at the same time, the threat of losing fiscal discipline is rising fast; that discipline needs to be maintained, and the tax incentives for a risk-taking, entrepreneurial culture need to be further strengthened.