Are good times about to end?
Experts warn cost of oil, 85-cent loonie threaten Canada's sizzling economy
STEVEN THEOBALD AND SHARDA PRASHAD
BUSINESS REPORTERS
You might think Canadians had rarely had it so good. Our dollar is at a 13-year high, Canada's benchmark stock index just hit its best level in five years and is within sight of breaking its record, and the housing boom continues unabated.
But economists caution that our recent prosperity is a double-edged sword.
Manufacturing jobs are in jeopardy, interest rates are heading marginally higher and housing construction is expected to slow, they say.
And average consumers are going to be squeezed by higher energy prices.
"It's a mixed story, that's what it is," said University of Toronto economics professor Peter Dungan.
The dollar surged yesterday to close at 85.57 cents (U.S.), up 0.73 of a cent and the highest close since January 1992, passing a threshold many economists say will begin to threaten more manufacturing jobs as Canadian exports become increasingly expensive.
Meanwhile, Canada's premier stock index, the S&P/TSX composite, closed at 11,024.73, the highest since September 2000.
Both were boosted by the price of oil, which in turn was driven up by fears that Tropical Storm Rita could hit the energy industry in the Gulf of Mexico this week in the midst of attempts to recover from the devastation of Hurricane Katrina.
Indeed, crude oil futures soared more than $4, marking the biggest one-day jump on record. Benchmark light, sweet crude for October delivery rose $4.39, or 7 per cent, to settle at $67.39 a barrel on the New York Mercantile Exchange.
The Canadian dollar has become a foreign-exchange speculator's currency of choice when oil prices surge.
And the "petro-loonie" could keep driving higher.
"If energy prices continue to escalate and the Bank of Canada doesn't sound any alarm bells, the Canadian dollar could go toward 90 cents," said Steve Saldanha, chief foreign exchange strategist at TD Securities.
Big gains in real estate and stock markets are helping keep consumers spending by making them feel wealthier. And borrowing has never been easier, thanks to ultra-low interest rates and flexible loan schemes.
But consumers will start feeling the pinch of skyrocketing energy prices this winter when home heating bills start rolling in, warned Andrew Pyle, senior financial markets economist at the Bank of Nova Scotia.
The high dollar and soaring energy costs will probably stop the Bank of Canada from raising its trend-setting interest rates much this year, perhaps only one more quarter-point increase, Pyle said.
Added senior economist Benjamin Tal of CIBC World Markets: "The economy will not be as strong as last year. Basically, there will be marginally higher interest rates, a strong dollar, high energy prices, and the housing market will level off."
Tal also believes the labour market is softening.
"At the beginning of the year, there were close to 20,000 to 25,000 new jobs being created (per month), and now there's about 15,000 new jobs," he said.
Canada is an exporting country, Tal added, so a strong dollar hurts the manufacturing sector.
Approximately 85,000 manufacturing jobs have been lost since the beginning of the year because of the high dollar, as one of Canada's competitive advantages is its low dollar, he said.
Higher energy prices also threaten both consumers and central Canada's manufacturers. The strong currency, which tends to rise when interest rates increase, is also a big problem for exporters facing intense competition from Asian rivals.
"This is clearly, clearly a double-barrelled challenge for the Ontario economy to have the dollar at a 13-year high and oil prices taking off again," said Doug Porter, deputy chief economist at BMO Nesbitt Burns.
National Bank Financial chief economist Clément Gignac pointed out Canada is alone as a net energy exporter among the Group of Seven nations, and the only one with a balanced budget. "So suddenly the country looks like a safehaven."
He says lower demand for oil from Asia will bring the oil price down to $50 a barrel and the dollar to 83 cents next year, "but in the short term, God knows."
Underscoring the impact of energy prices on Canadian equity markets this year is the fact Calgary-based energy producer EnCana Corp. slipped past the Royal Bank of Canada to become the country's largest company by stockmarket value. |
