Is Canada’s economy poised to take off?

OTTAWA — Foreigners are buying up Canada, the loonie is heading for parity with the American dollar and recent economic indicators are off the map. Could the recovery be outracing expectations?

OTTAWA — Foreigners are buying up Canada, the loonie is heading for parity with the American dollar and recent economic indicators are off the map. Could the recovery be outracing expectations?

The prime minister is a skeptic, and so too are economists at the TD Bank, who released a forecast Thursday of moderate growth for the next two years.

The bank says Canadians shouldn’t get overly excited about the surprisingly strong five-per-cent fourth quarter of 2009 jump, and likely strong number coming for the first three months this year.

“The basic story is the economic recovery is real — we are not going to have a double dip (slump) — but the economy is not going to boomerang,” said TD’s deputy chief economist Craig Alexander.

In an address to G20 bureaucrats Thursday morning, Prime Minister Stephen Harper voiced a similar message, saying the recovery is “by no means fully assured.

Harper and Finance Minister Jim Flaherty have been cautious for months, saying it’s too early to tell whether the economy is producing enough new jobs to sustain lasting growth. Since last summer, the economy has produced 159,000 jobs, replacing just over a third of the 417,000 jobs wiped out during the 2008-2009 recession. The unemployment rate has dropped half a point since August but is still at 8.2 per cent.

But while analysts say it is wise for governments to remain cautious about the recovery, a growing number of economic observers are also starting to rethink the modest, steady growth scenario.

Merrill Lynch chief economist Sheryl King says she would not be surprised if Canada experienced a “triplet” of five-per-cent quarters — last quarter of 2009, first and second quarters of this year. Although King says things must slow after that.

And the Bank of Montreal’s Douglas Porter believes if there is an economic surprise this year, it’s that growth will be significantly stronger than the official forecasts of about three per cent.

Certainly the world believes Canada is going great guns at the moment.

Foreign investors bought up $11.8 billion in Canadian bonds and stocks in January, bringing the total for the last year to a record $111 billion. That’s seven per cent of gross domestic product, notes Porter.

The conventional view, as stated by the TD Bank, is that Canada still faces considerable headwinds that will slow the economy after the initial sprint forward.

A cooling housing market, rising interest rates, the end of government stimulus spending and the high loonie will all act as brakes to growth, TD economists say. So too will slow growth in the U.S., Canada’s key export market

Businesses may have psychologically made their peace with a dollar at par with the U.S. currency, but it still will mean that exporters will find it harder to sell abroad.

And rising interest rates, which the bank said could start as soon as July, will limit the ability of Canadians to keep spending and supporting the domestic economy.

The bank said that by 2013, once interest rates return to more normal levels, the average household debt service costs will rise to 9.3 per cent of income from the current six per cent and households will have to devote a greater share of their income to servicing their debt.

As a result the economy will advance 3.1 per cent this year, slightly higher than the Bank of Canada projected a few months back, and 2.9 per cent next year.

That level of growth will produce about 20,000 to 25,000 new jobs each month, a moderate rate of job creation.

“An average of three per cent growth is not a terrible outcome, but it is a little disappointing given the depth of the recession,” admits Alexander.

That’s still the consensus analysis, says Porter, and he has expressed it as well.

The alternative, which he says is gathering steam, is that the U.S.’s 5.9-per-cent advance in the fourth quarter is no fluke.

And to date, the U.S. economy has yet to create net new jobs, but many are predicting that employment growth likely began in March and could add two million more workers by the end of the year.

That will help Canadian exports recover, since three quarters of what Canada sells to the world heads south of the border.

As well, Canada’s budget calls for another massive round of infrastructure stimulus this year, which is giving the economy an additional boost.

The icing on the cake, adds King, is that Canadian businesses have yet to ramp up on depleted inventories, something that gave the U.S. a four-per-cent bounce at the end of last year. That could happen in the second quarter in Canada’s case.

“We haven’t had it yet and we always get it,” she said of inventory build-up following recessions.