Deficit, Growth and the Canadian dollar

Demand for Canadian assets by foreign investors continues to grow at an almost uncomfortable level, account for more 8% of GDP today.  One reason is that the Canadian federal deficit for the current year is anticipated to be around 2% of GDP (slow down Nelly it sounds better than reality!).  The issue is that in Canada, the provinces account for a substantial portion of total government activity.  In fact, at a Federal level, Canada’s government should be generating a surplus, since the economy is “humming along”. 

Late last week, the Ontario government (Canada’s largest province by population, wealth and GDP), gave an update on the state of the nation.  Certain surprising facts:

• Deficit is anticipated to be $1 billion lower at $18.7 billion (or 3.1% of the GDP), the reason – revenues are higher ($750) and costs were lower ($250).
• Ontario has revised its growth forecast to 3.2% from 2.7% as a result of the better level of economic activity – tax receipt are an undisputable proof of higher economic activity.
• The one negative aspect Ontario has reduced its forecast GDP growth for the next two year by one percent, taking the 2011/12 number from 3.2% to 2.2%.

National Bank of Canada had a very interesting (although slightly flawed) analysis indicating that the Canadian dollar still has lot of room to maneuver since it has appreciated a lot less than the Kiwi or Ausi dollars!  Although this is correct, neither of these countries export a great deal to the U.S.  – their target market is Asia in general and China specifically, which changes the equation slightly, whereas the U.S. is Canada’s largest trading partner, accounting for 70% of our exports. The implication of Canada's exposure to the U.S., is that it is there that Canada's competitive pressures exist, for Australia and New Zealand it is elsewhere. 

If what is occurring in Ontario is also true for Quebec (Quebec’s economy is doing better than Ontario, with better tax revenues, and possibly lower expenditures.  Although the public unions are looking to extract their pound of flesh with high wages and salaries.

No wonder foreigners are attracted to Canada's sovereign bonds, the place looks reasonable compared to the rest of the OECD.  although my historical standards, Canada's fiscal shape is not that great, but for investors its not absolute that count, but relative performance.  On that scale, Canada is the place to be.