By Eric Roseman
Just twelve months ago, Canada was basking amid a commodity boom accompanied by a bull market in the Canadian dollar, which actually surpassed par-value against the American dollar in late 2007.
But in the span of just six months, the Canadian economy has come unglued in a bad way. Exports are plunging, manufacturing is sliding deeper into recession and commodity prices are collapsing. The Canadian dollar, which hit a 7% premium above the U.S. dollar in late 2007 at C$0.93 cents, tanked more than 20% in 2008.
Canada, which was mired in a string of deficits starting in 1975 finally cleaned house under former finance minister and prime minister, Paul Martin. By 1995, Martin took Canada into budget surplus.
Canada, however, ranks among those countries in the G-7 with the highest ratio of total bank deposits to liabilities, according to Credit Suisse. Only Japanese banks have a higher ratio. At 70%, that figure is high and exceeds the United States and Europe, excluding the UK, by more than 20%.
Unlike the United States and other European banks, Canadian financial institutions didn't go whole-hog on mortgage derivatives or subprime loans over the last several years. In Canada, a prospective homeowner actually needs a job to support his mortgage payments and must typically put down a 25% deposit - not exactly the keen requirement in the United States before the subprime crisis surfaced in 2007.
Canadian banks, however, did suffer large losses on asset-backed commercial paper starting in late 2007 with a few hundred billion dollars written off bank balance sheets.
Still, despite harboring one of the lowest leveraged economies in the industrialized world, Canada is highly reliant on Asian demand for its raw materials and, of course, U.S. consumption, which is responsible for more than 85% of Canadian exports.
Canada is now in a recession. Economic growth has stalled, the loonie has declined by a third since its peak and exports climbed only 3% in November compared to a year ago.
After reveling in a string of impressive budget surpluses for more than a decade, the Harper Conservative government announced its 2009 budget yesterday - sinking Canada into its first deficit hole in more than ten years as a result of rapidly declining economic growth, rising unemployment and a housing boom gone bust.
Canadian finance minister, Jim Flaherty, announced a series of big spending initiatives to spur the economy. Canada will spend C$165 billion dollars (US$135 billion) on infrastructure projects across the country, tax breaks for companies and individuals while extending unemployment insurance for the more than 2.3 million workers now out of a job.
Canada is entering a recession with the best relative balance sheet among the world's largest economies. Despite Ottawa's first budget deficit in more than ten years, the banking system remains relatively strong with none of its major six banks requiring government support or bailouts - at least not yet.
If this economic downturn persists beyond 2010 and commodities don't recover, Canada will probably head back into the economic abyss circa 1970s. China is a major consumer of her raw materials along with the United States and both economies don't look set to rebound until 2010 at the earliest. That spells more trouble for Canada and, possibly, a banking crisis that has yet to hit her financial markets.