Without Martin, economy is still strong

It was true in 2002, and it is true now. (in this old story, of course the statistics are old.)

Sherry Cooper

National Post

Friday, June 07, 2002

They said it about Paul Volcker, John Crow and Robert Rubin. They said that no one could ever fill their shoes, the markets would tumble and all credibility would be lost. They say it now as well about Alan Greenspan, the nearly octogenarian Chairman of the Federal Reserve Board. His successor could never garner the respect and admiration that the Maestro enjoys. But just as we have seen this week with the exit of Paul Martin, no one is irreplaceable. No single individual really matters that much. The institutions that surround them and the political and economic climate assure an orderly progression. That is not to belittle the role that Mr. Martin has played in eliminating our budget morass and returning Canada to the triple-A status it so rightly deserves; but the machinery of the markets is much too big to allow one individual to seriously knock it off course.

And the course that Canada is on is a great one. I have just returned from a seven-city speaking tour of Europe. It felt like the old days -- the rooms were full and the interest was keen. To be sure, many were interested mainly in Canadian gold stocks, but the turnaround in the economy, the currency, and the basic industry stocks was noted and appreciated.

Canada is now a top performer. We have the strongest economy in the G7 with the best growth prospects for this year and next. We are the only G7 country with a dual surplus, in our trade and current accounts, as well as in our federal budget. Our debt ratio has plunged from a high of 71% in 1995 to around 47.5% and falling, today. With Japan's debt ratio at an unprecedented 140% or so, Canada's fiscal position is nothing short of miraculous. That is why Moody's upgraded us to triple-A status on May 3.

With the economy on wheels, consumer confidence at a 14-year high and the Bank of Canada flexing its muscles independently of the Fed, it is not surprising that Paul Martin's exit was met with only passing interest. Stories in the European Wall Street Journal, Herald Tribune and London Financial Times lauded his accomplishments, but went on to compliment the choice of John Manley as his successor and assure that fiscal restraint would likely continue. The Canadian dollar barely missed a beat.

For sure, the big case for Canada today is rising commodity prices. Gold prices recently hit a 4 1/2-year high as investors fear continued turmoil in India-Pakistan and the Middle East. The looming threat of additional terrorist attacks on the United States, coupled by the self-inflicted accounting scandals, Wall Street research probes and earnings disappointments, continue to depress the dollar and encourage foreigners to park at least some of their capital elsewhere. In this environment, gold stocks are seen as a safe haven. All the materials sectors of the TSX have put in a stellar performance this year. Merchandising companies, as well, have been boosted by the robust consumer.

Inflation, though moderately above the Bank of Canada's target, will not be a problem this cycle. Inflation tends to decline in the first year of economic expansion in lagged response to the excess capacity of the earlier slowdown. Moreover, the Bank has proven itself to be ever vigilant on the inflation front, likely hiking interest rates on every statement date for the remainder of this year. A strong performance in the stock market as a whole awaits a meaningful earnings rebound outside of basic industries; but, on an exchange-adjusted basis (accounting for the upward movement in the loonie), the TSX has outperformed the S&P 500 this year by a whopping 1,200 basis points, or 12 percentage points. Interest-rate differentials between Canada and the United States will continue to widen, thanks to a proactive Bank of Canada, so bond investors are taking note as well. Canada is increasingly the place to be -- not a bad time for a rookie Finance Minister to cut his teeth.

The risks are there, as always. A large and precipitous decline in the U.S. dollar would be destabilizing for the global economy. That is why central banks from Switzerland, to Australia to Japan are defending the U.S. dollar. Too sharp a rise in non-U.S. dollar currencies would snuff out the nascent rebound in domestic exports and dampen the domestic economy. But a precipitous drop in the greenback is unlikely. The U.S. dollar is still the only true reserve currency. Until Britain adopts the euro, it will be a far distant second. The U.S. growth pace will still be double the European average this year, and U.S. productivity growth is second to none in the world. As top-line revenues rebound, bottom-line profits will as well. So foreign interest in American assets will continue, albeit at a more tepid pace than in the past few years.

Canada now has its day in the sun. It has been a long time in coming, and even Mr. Martin's departure will not rain on this event.

© National Post 2002