A tale of 2 countries – Canada and US (reversal of) fortunes in the post financial crisis period

  • October 26, 2014

For the majority of the post financial crisis time period, Canada has outperformed the United States on key economic metrics such as GDP growth, unemployment rates and median income growth.[1]

These results were (yes, past tense) impressive:

  • In 5 of the past 6 years, Canadian enjoyed stronger growth in GDP than the United States;
  • Canada’s employment performance was better than the US, post financial crisis through 2013, reversing a long standing trend of American unemployment rates being lower than Canadian;
  • Over this same time period, Canadian incomes moved up faster than in the US.

However, our half decade of economic success relative to our American neighbours has come to an end.

Shifting into 2014 and beyond, Canada is now lagging the United States across a host of economic measures and this pattern is expected to persist over the next two years at least.[2]

This begs the question: why the reversal of fortunes?

The answer to this is fairly simple in the short term and more complex in the long term, with important internal and external considerations driving both.

In terms of external drivers, as a middle power that relies heavily on exports of resource-based goods to generate wealth, Canada clearly took advantage of the decade long run in many commodity prices that mirrored the spectacular growth of Asia (China in particular).[3] This trend enabled Canada to increase our resource exports, diversifying the country’s export profile away from the traditional heavy reliance on US demand.[4] The Asian growth story provided commodity exporters in Canada an opportunity to rebound quicker than the US from the effects of the financial crisis. The effect was magnified by the larger role of commodity based industries in the Canadian economy compared to the US. Well positioned commodity exporters like Australia, Brazil and Canada reaped the benefits of surging global demand and higher prices for metals, industrial raw materials, and agri-food products.

Now, as the commodity ‘super cycle’ has cooled over the last 30 months, so too have the benefits to resource exporters.[5] Thus, a comparatively negative shift has now occurred as Canada is far more exposed to the global commodity downturn, while the US – other things being equal – is now in a better position than Canada.

Looking at domestic economic considerations, the picture is more complex. While Canada emerged from the financial crisis with some real strengths vis-a-vis the US – a healthier banking system, a much stronger government fiscal situation, stronger housing markets and an improved investment climate – as a country we have largely failed to spur improvements in core drivers of longer term economic prosperity such as productivity gains and sustained high levels of non-residential business investment.

Frustratingly, Canada has also seemed unable to convert our areas of (moderate) strength, such as high post-secondary education expenditures, strong SME formation and our infrastructure/strategic location, into more enduring economic benefits that could help maximize longer term measures of prosperity.

Conversely, when we look at some of the domestic considerations in the United States we see previous weaknesses being replaced by a series of strengths. Business investment is rising more quickly than in Canada, spurred by healthy corporate balance sheets; strong employment gains and confident consumers. Less dependence on commodity production and a much greater focus on high technology, goods and services and advanced manufacturing is also helping to the US to outpace Canada. Meanwhile, the ongoing shale oil and gas revolution is dramatically lowering energy costs and lessening US reliance on energy imports. Combined with relatively solid productivity gains, the United States is positioned to outperform Canada and most other advanced economies for at least the next two years.[6]

While Canadians always take some pride and satisfaction in ‘beating’ our (best) friends to the South, the reality is our run of comparative economic success is over, for now. The challenge now is to take a hard(er) look at some of the more complex factors that can help Canada to regain some of that edge over time.

The good news, and it is very good news, is that our close historical linkages to the United States mean that we will be able to ride the coattails of a rebounding US economy with decent, if not spectacular, economic outcomes over the next several years - outcomes that many other advanced economies (Japan, the EU) are likely to envy.


[1] See World Bank data centre to generate a wide variety of comparative charts http://data.worldbank.org/ . IMF and OECD reports also provide useful snapshots.

[2]http://www.citibank.com/wealthmanagementlatinamerica/homepage/investmentpublications/pdf/Global_Economic_geos.pdf

[3] http://www.imf.org/external/np/res/commod/Charts.pdf. This chart can be further broken down into various inputs, many of which tracked strongly, recovering quickly from the effects of the financial crisis.

[4] http://theasiafactor.ca/ca#e=0&e0=0&scrollTo=e This interactive graph shows how trade patterns have shifted over the 2000-2014 timeframe.

[5] For a good review of these trends, see the Economist commodity tracker.

[6] CITI Bank estimate is for the next 4 years, with Canada potentially overtaking the US again in 2018.