Northern Exposure: Could Canada's Recovery Stall?

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Cathryn Atkinson / AFP / Getty

A container ship unloads at the P&O Central Terminal in the Port of Vancouver

After months of seesawing from good to bad news, Canada seems to have finally pulled away from the global recession and put its economic travails where they belong — in the rearview mirror.

The Bank of Canada's fall survey of business confidence shows 69% of the country's business leaders expect their sales volume to increase at a greater rate over the next 12 months, compared with the previous year. That's the best reading since the country's central bank began compiling these quarterly statistics more than a decade ago.

At the same time, Statistics Canada, a government agency, reports that unemployment fell three-tenths of a percentage point to 8.4% in September, the first monthly decline since the beginning of the labor market slump a year ago. According to the report, 31,000 net new jobs were created last month.

However, economists and manufacturers are quick to caution that the good news could be short-lived if the Canadian dollar keeps climbing toward parity with the U.S. greenback. The loonie, named after the lake bird engraved on Canada's $1 coin, hit a high of 97 cents this week, its highest level in 12 months and a 24% increase from the low of 78 cents earlier this year.

"There's no doubt that a recovery is at hand," says economist Krishen Rangasamy of Toronto-based CIBC World Markets. "But the strong Canadian dollar will act as a break on the Canadian economy." He expects Canada's GDP to grow at an annualized rate of 3.3% in the fourth quarter, and 2% in 2010. This compares with CIBC's lower estimate of GDP growth for the U.S., with 2.4% expected for the fourth quarter and 1.5% for 2010.

But this favorable outlook for Canada is predicated on a loonie that pulls back about 10% to 89 cents. That's a risky bet in a marketplace where institutional investors are dumping U.S. dollars — which were seen as a safe haven during the darkest hours of the global recession — and moving into more attractive investment opportunities as financial markets rebound.

Trade is the big wild card. Canada is riding a wave of replenishment by U.S. automakers and manufacturers, whose inventories hit record lows earlier this year as a result of restructuring and a downward spiral in consumer spending. But it's unclear how long that can sustain a recovery north of the 49th parallel. "If the Canadian dollar stays where it is, the job numbers will go the other way [i.e., worsen]," says Jean-Michel Laurin, vice president of global business policy for Canadian Manufacturers & Exporters (CME), the country's largest trade and industry association.

Canada's economy may have shown a big job improvement in September, but that has to be seen in the context of losing 210,000 manufacturing jobs over the past 12 months. According to CME, Canada normally sacrifices 25,000 jobs and $1.9 billion in revenue for every one-cent improvement against the U.S. dollar.

Those who remain optimistic about Canada's economy point to a changed industrial landscape, with Canadian companies now more competitive. "The [recession] survivors are in pretty good shape," says Gerry Fedchun, president of the Automotive Parts Manufacturers' Association. "They've become more efficient, which means they can make money at lower volumes and margins."

Canada and the U.S. are each other's biggest economic partners, with annual two-way trade valued at more than $600 billion before the bite of the latest recession.