Maple Leaf Blues

By now you may know that the US isn’t in a recession, yet. In fact, our economy defied the naysayers and actually grew almost 1% last quarter.

But there’s one place that the economy did shrink this winter: Canada. Last quarter the Canadian economy shrank by .1%. The government reported that the economy stalled due to widespread cutbacks in manufacturing, especially cars.

How can that be, you ask. Canada pumps all that oil. Well, the oil boom has led to a very strong Canadian Dollar. And the strong Looney has led to widespread contraction in exports.

This is the “Dutch Disease,” where a strong commodity leads to a strong currency which hurts the general economy. The term was coined when natural gas was discovered in Holland in the ‘60s. This led to a decline in Dutch manufacturing at that time.

The best hope for the Canadian economy is probably to sock away some of the excess revenues from oil. This will slow the Looney’s appreciation and give other manufacturers a chance to adjust to the stronger Canadian Dollar. Otherwise, the Looney’s rise is likely to lead to the Maple Leaf’s fall.

Douglas R. Tengdin, CFA
Chief Investment Officer
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