Apr 2011 24

Will the Economy Hit a Wall Soon?

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Photo by Emanon Photography Photo by Emanon Photography

Investors, brokers, and global businesses are currently enjoying very pleasant Canadian market conditions. These include the stable dollar, high profits from commodities, and bonds and equities. All of these factors have lured quite a lot of capital into the country. Canada dealt with the recession much more effectively and (more importantly) quickly than both the U.S. and Europe. Canada’s resource situation is very strong as well, adding another item to its “economic potential cart.”

However, once the boom is gone and the commodity market has calmed down, the economy will very likely experience a downturn, and the country will no longer be able to produce sufficient growth to compensate for the lack of fiscal prudence. MRB Partners, an investment research outfit based in Montreal, reported: “The euphoria needs to be kept in check. Oil and rocks have masked substantial and rapidly growing imbalances that will prove devastating if not corrected before the next global economic recession.”

A very similar scenario happened in the Netherlands, where a natural gas find in the North Sea in the 1960s resulted in huge profits for the Dutch economy, only for the economy to collapse under the weight of such a rapid income increase. The business sector shrank, exports declined, and manufacturers became uncompetitive. The similar situation concerning exports of Canadian manufactured goods had already occurred before the boom. The strong CAD did not help exporters to resurrect their businesses. “It really hollowed out chunks of the Canadian business sector,” said Phillip Colmar, a partner with the global strategy team at MRB Partners. It might be enough to continually lighten holdings, yet keep the boom rolling.

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