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Corporate profits are at 50-year highs Jacqueline Thorpe - Financial Post June 27, 2006 [KDR: So the US is in the worst shape it has ever been in, with spiralling debt and a vanishing manufacturing sector among many other things. Canada is only doing slightly better. You would get the impression that things could not be better? Is the average Canadian's profit at a 50 year high?] Canada is enjoying the best economic fundamentals in 50 years and will likely surpass U.S. growth next year as the loonie rises toward par against the greenback, according to a slew of bank reports yesterday. But the reports also warned that Alberta's economy is so hot that it is starting to fuel inflation across the country. The reports come as David Dodge, the Bank of Canada governor, seemed to play down inflation risks, indicating the bank would stick to its plan to keep interest rates at 4.25% through the summer. Clement Gignac, chief economist at National Bank in Montreal, wrote in his summer outlook that while some exporters have had a hard time remaining competitive with the dollar now at US90 cents, many have adapted well and are enjoying heavy global demand for their products. Corporate profits are at 50-year highs, the unemployment rate is at a 30-year low, and Canada is sporting the best government finances in all of the G7, he said. "Canada's solid economic fundamentals are the dream of many an industrialized nation, and without a doubt the best the country has seen in 50 years, making for an environment that should push the loonie close to parity [with the U.S. dollar] by the end of 2007," Mr. Gignac said. While he believes the Toronto stock market will continue to struggle this year -- ending the year at 10,500 compared with 11,130 yesterday -- as commodity prices continue to cool, the economy is carrying such momentum that it will continue to coast along at a healthy clip. "Even if oil prices drop by US$20 bucks to US$50 per barrel from US$70 the oilsands will be developed nonetheless," Mr. Gignac said in an interview. "Even if copper drops from US$4.00 a pound to US$2.00 ... drilling activity would continue because US$2.00 is a very good price for copper." He sees Canadian growth at 2.7% next year compared with 2.4% for the United States, though both economies will slow as global growth takes a breather after four years of above-trend growth. Article Posted at www.KnowledgeDrivenRevolution.com Royal Bank of Canada also believes Canada will do better than the United States next year "due to the rising contribution of business investment to growth." Meanwhile Goldman Sachs, the Wall Street investment bank, suggested yesterday Canada's fatter household savings could help it "decouple" from an expected slowdown in the United States. The bank noted U.S. household spending was 1.3% more than income in the first quarter while the savings rate has been negative for more than a year. Canada, meanwhile, has a 1.9% savings rate -- all the better to spend. The key factor behind Canada's success in recent years has been a massive increase in its "terms of trade." Canada is getting way more for exports than in previous years as commodity prices soared. Meanwhile, a rising dollar has meant the cost of imports has plummeted. "Back in 1999, say, a barrel of oil cost about $20 and a personal computer $2000," explains David Wolf, Canadian economist at Merrill Lynch. "Today a barrel of oil costs about US$75 and a personal computer $750. A barrel of oil thus buys ten times as much computer as it did just a few years ago." This transfer of real income from commodity consumers such as the United States to producers such as Canada has underpinned surges in both spending and savings, kicking off virtuous circles whereby strength in the economy, asset prices and the Canadian dollar have all become mutually reinforcing, Mr. Wolf said. But all is not rosy. "There are increasing signs that Alberta's white-hot economy has morphed into a classic boom, replete with labour shortages, surging real estate prices, and thus very real inflation pressures," Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said in a report. While inflation pressures had previously been confined to Alberta, it now seems the province's "economic cauldron is boiling over, scalding the rest of the country with higher inflation and putting renewed pressure on the Bank of Canada to keep raising rates," he said. Earlier this week Statistics Canada reported "core" inflation -- which strips out volatile items like energy and vegetables -- unexpectedly jumped to 2.0% from 1.6%. Mr. Porter said Alberta is now sucking in labour from the rest of country, opening up jobs elsewhere that are quickly being filled and pushing down the unemployment rate across the country. But after a speech this week, Mr. Dodge urged financial markets to look through the recent batch of strong data toward 2007 and 2008, where he sees both global and Canadian growth gradually cooling. That could solve any brewing inflation problem. About KDR \| \| Home \| \| Weekly Features Archive	Weekly Weekly Features Archive
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Corporate profits are at 50-year highs

Jacqueline Thorpe - Financial Post
June 27, 2006

Business [KDR: So the US is in the worst shape it has ever been in, with spiralling debt and a vanishing manufacturing sector among many other things. Canada is only doing slightly better. You would get the impression that things could not be better? Is the average Canadian's profit at a 50 year high?]

Canada is enjoying the best economic fundamentals in 50 years and will likely surpass U.S. growth next year as the loonie rises toward par against the greenback, according to a slew of bank reports yesterday.

But the reports also warned that Alberta's economy is so hot that it is starting to fuel inflation across the country. The reports come as David Dodge, the Bank of Canada governor, seemed to play down inflation risks, indicating the bank would stick to its plan to keep interest rates at 4.25% through the summer.

Clement Gignac, chief economist at National Bank in Montreal, wrote in his summer outlook that while some exporters have had a hard time remaining competitive with the dollar now at US90 cents, many have adapted well and are enjoying heavy global demand for their products.

Corporate profits are at 50-year highs, the unemployment rate is at a 30-year low, and Canada is sporting the best government finances in all of the G7, he said.

"Canada's solid economic fundamentals are the dream of many an industrialized nation, and without a doubt the best the country has seen in 50 years, making for an environment that should push the loonie close to parity [with the U.S. dollar] by the end of 2007," Mr. Gignac said.

While he believes the Toronto stock market will continue to struggle this year -- ending the year at 10,500 compared with 11,130 yesterday -- as commodity prices continue to cool, the economy is carrying such momentum that it will continue to coast along at a healthy clip.

"Even if oil prices drop by US$20 bucks to US$50 per barrel from US$70 the oilsands will be developed nonetheless," Mr. Gignac said in an interview. "Even if copper drops from US$4.00 a pound to US$2.00 ... drilling activity would continue because US$2.00 is a very good price for copper."

He sees Canadian growth at 2.7% next year compared with 2.4% for the United States, though both economies will slow as global growth takes a breather after four years of above-trend growth.

Article Posted at www.KnowledgeDrivenRevolution.com

Royal Bank of Canada also believes Canada will do better than the United States next year "due to the rising contribution of business investment to growth."

Meanwhile Goldman Sachs, the Wall Street investment bank, suggested yesterday Canada's fatter household savings could help it "decouple" from an expected slowdown in the United States.

The bank noted U.S. household spending was 1.3% more than income in the first quarter while the savings rate has been negative for more than a year. Canada, meanwhile, has a 1.9% savings rate -- all the better to spend.

The key factor behind Canada's success in recent years has been a massive increase in its "terms of trade." Canada is getting way more for exports than in previous years as commodity prices soared. Meanwhile, a rising dollar has meant the cost of imports has plummeted.

"Back in 1999, say, a barrel of oil cost about $20 and a personal computer $2000," explains David Wolf, Canadian economist at Merrill Lynch. "Today a barrel of oil costs about US$75 and a personal computer $750. A barrel of oil thus buys ten times as much computer as it did just a few years ago."

This transfer of real income from commodity consumers such as the United States to producers such as Canada has underpinned surges in both spending and savings, kicking off virtuous circles whereby strength in the economy, asset prices and the Canadian dollar have all become mutually reinforcing, Mr. Wolf said.

But all is not rosy.

"There are increasing signs that Alberta's white-hot economy has morphed into a classic boom, replete with labour shortages, surging real estate prices, and thus very real inflation pressures," Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said in a report.

While inflation pressures had previously been confined to Alberta, it now seems the province's "economic cauldron is boiling over, scalding the rest of the country with higher inflation and putting renewed pressure on the Bank of Canada to keep raising rates," he said.

Earlier this week Statistics Canada reported "core" inflation -- which strips out volatile items like energy and vegetables -- unexpectedly jumped to 2.0% from 1.6%.

Mr. Porter said Alberta is now sucking in labour from the rest of country, opening up jobs elsewhere that are quickly being filled and pushing down the unemployment rate across the country.

But after a speech this week, Mr. Dodge urged financial markets to look through the recent batch of strong data toward 2007 and 2008, where he sees both global and Canadian growth gradually cooling.

That could solve any brewing inflation problem.