Who Has the Bragging Rights?
Is Canada losing its bragging rights? Since 2007, we’ve been doing a lot of self-congratulatory back-patting, owing to our economy’s better performance through the recession, and the resulting better tone to our jobs market. But of late, it’s been three cheers for the red, white and blue, as America’s jobless rate has turned sharply lower, while Canada’s has drifted in the wrong direction.
The pure unemployment rate comparison, now 7.6% in Canada vs. 8.3% in the US, flatters the American figures relative to the underlying reality. Until recently, more of the “improvement” stateside owed to a drop in labour force participation, as those of working age gave up looking or stayed in school. The US methodology makes it tougher to be counted as actually looking for work, and thereby excludes more potential job seekers from the unemployment ranks.
Employment stands at 61.6% of the working age population (15 and over) in Canada, and only 58.5% in the US (for those 16 and over). So the true gap isn’t the 0.7%-point difference in the unemployment rate, but the massive 3.1%-point gap in the share of those who are working.
Still, Canada’s lead on that score has been narrowing since last June, and US GDP growth also looks to be edging out Canada of late. To some extent, that reflects the fact that the biggest sources of the earlier growth differential, housing and households’ access to credit, may be fading.
Canadian housing starts and prices are showing signs of hitting a plateau, so home building and the housing wealth effect could soon drop out of the residential construction and consumption components of GDP respectively. US housing is hitting a turn the other way. Price declines might be abating, after adjusting for the downward bias on average prices from sales of foreclosed properties that might not be in ideal condition. Rising apartment construction and flat single family home building are combining to turn residential construction into a modest plus for GDP.
But winning the 2012 battle does not mean that the US will win the economic growth war further out. Both countries face a drag from fiscal belt tightening in the coming years, but America’s will be at least twice the scale of that in Canada, given the much larger total government deficit that the US is starting from. Look for Canada to nose out the US for the growth lead come 2013, when huge tax hikes and spending cuts are slated to dampen America’s prospects.
By Avery Shenfeld CIBC Economist