Monday, July 20, 2015

Canada and Australia

Two resource rich countries nearly identical stories -- I wrote about this risk years ago; Canada and Australia are second derivative countries, largely open what happens to these economies is largely driven by what happens elsewhere.  In the case of Canada and Australia that elsewhere is China -- Australia more directly than Canada but the end results are the same.

Case and point, both currencies flirted with US dollar parity (CAD even reached 0.95 at one point), now both are trading in the 1.30/1.35 range.  Usually, for manufacturing companies in country this would be very helpful, but the reality is that both countries manufacturers have sought over the years to insulate themselves from currency fluctuation (trust me its possible), although a 37% drop from its peak is hard to plan for...

Bottom line both economies are now suffering because their customer (China) is having a bit of a hard time.  The question then becomes how long will this situation persist?  The question then becomes where is China going.  There is no doubt that the current "situation" is unsustainable -- the reaction of the Chinese government to the most recent stock market "correction" is somewhat out of character.  After all the market was up nearly 120% over the past 12 months -- a 30% correction should not have cause the Chinese government to stop all IPO, suspend nearly half of all stocks  and brand "stock sellers as traitors".  Something more serious is happening here -- as many commentators have noted the stock market is not a very important portion of the Chinese economy (when compared to the real estate market), the over-reaction would seem to hide more serious concernes.

Anyway, this is not about China (well it is a little bit), but Canada and Australia are suffering from the same "sickness":  both are wide open economies that rely on the sale of natural resources to keep their economies strong -- when international demand falters; then Canada and Australia suffer.

Canada and Australia are perfect example of second derivative countries -- its is the world's overall economic health that determines how well they do.  Here in Canada general elections are just around the corner (this autumn) and you can bet that all parties are going to work extra hard on promoting their ideals and solutions are Canada's faltering economic growth -- when in fact Canada's growth has little to do with Canada -- but how fast China gets its mojo back!

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