How Canada fares when fortunes flip

DONALD COXE December 19 2005

How Canada fares when fortunes flip

DONALD COXE December 19 2005

How Canada fares when fortunes flip


For Canada, the change from the

nineties to the oughts meant that, in economic and financial terms, many of the past decade’s most conspicuous winners have traded places with conspicuous losers.

The nineties were the best of times for industrial workers—principally in Ontario. NAFTA, the diving loonie, falling commodity prices and dropping interest rates meant booming job growth, and strong real incomes. Ontario became the nation’s immigration magnet, attracting roughly 60 per cent of the new arrivals. Although the unions and the left fought bitterly against free trade, it proved to be a gigantic job-generator, particularly in southwestern Ontario. The technology boom, led by Nortel and JDS Uniphase, created thousands of well-paid jobs, and stock options created a new class of nouveaux riches.

What was great for Ontario wasn’t so good for the rest of the country—particularly the West. The bursting of the national real estate bubble hit Vancouver and Calgary especially hard. Not only were those cities overbuilt, but the commodity price plunges spawned empty office towers, and slashed homeowners’ incomes. Those were hard times for hewers of wood, drawers of oil, or diggers in the depths of the earth.

Unless you were a smart (and lucky) speculator in tech stocks, the 1990s weren’t a great time for Canadian investors, compared with the record rates of return on U.S. equities. The ’90s were Wall Street’s best-ever decade. A world awestruck at the so-called “New Economy” saw that the greatest players came from California and Texas—and eagerly sent its money where the action was. The soaring U.S. dollar meant that even cautious Canadians (and Europeans) who bought U.S. bonds had currency-adjusted returns greater than their compatriots who owned Canadian and European stocks.

Cheap coal, oil and gas meant that Quebec’s biggest asset—cheap hydro power—was insufficient enticement to multinational companies to open plants to serve NAFTA markets, given the province’s overarching disadvantage: political uncertainty. The close referendum vote produced a sigh of relief, but corporations taking the long view of plant location continued to choose Ontario.

Then came the millennium—a new kind of global economy, and a Pirandello-style switch of roles between winners and losers. The commodity boom transformed Calgary into the nation’s boom city in Canada’s richest province. The election of a business-friendly provincial government and a roaring commodity market mean good times again in B.C. Vancouver real estate is once again among the nation’s priciest. The Greens in Victoria are in a funk, but B.C. is on the move. Those rising commodity prices have also meant better times across the Prairies, and in Atlantic Canada. Rather suddenly, Quebec’s electricity generating surplus is not only generating rising returns for Hydro-Québec, but the prospect of new manufacturing investment (if the political risk issue doesn’t come back to haunt the province’s business development promoters).

Meanwhile, in Ontario, the easy pickings are over for those who don’t have jobs tied to the booming financial markets. The automobile assembly and parts industries are watching in horror as Michigan’s fourth biggest employer, Delphi, implodes, and GM, its biggest employer, struggles to avoid bankruptcy, while its second-biggest employer, Ford, tries to escape being added to the death-watch list. The high-flying loonie has taken away

much of Ontario’s competitive advantage; soon, bankrupt U.S. companies will shed their other competitive disadvantage—expensive employee and retiree health care compared with the subsidy Ontario plants get from Canada’s health care system.

Ontario’s competitive advantages had meant that the Big Three had been allocating manufacture of some of its hottest models—SUVs—to Ontario factories. Now, US$60 oil threatens those great gas-guzzlers with something on the order of what global cooling did to the dinosaurs.

With gasoline selling near 90 cents a litre, and natural gas at near-record prices, Ontario’s debt-laden consumers are finding their discretionary incomes pinched. They ain’t seen nothin’ yet: those who look at the province’s electrical generating mess think the horrendous energy problems will come next summer and thereafter. Because of a decade of dithering on plant construction, Ontario has become

pathetically dependent on supplies from the U.S. and Quebec. Those suppliers look at the province’s locked-in shortages for years to come, and muse happily about how splendidly they will profit from Ontario’s toxic blend of arrogance, ideology and folly. Ontario’s most vocal Greens’ opposition to building plants isn’t merely NIMBY (Not In My Backyard), it’s BANANA (Build Absolutely Nothing Near Anyone), if not NOPE (Not on Planet Earth.)

Although the great days for Ontario’s workers are over, and its consumers face daunting energy costs, there are still millions of winners. The stock investors who got such meagre returns in a weak currency during the nineties have been luxuriating in the returns from the best stock market and best currency in the industrial world. The TSX’s heavy weighting in oils and mines has meant that Canadians—including Canadian pension funds—have enjoyed an abundance of investment opportunities. Even Canadian bond investors are winners: Canada has one of the best-performing bond markets in the world. On the other hand, those Canadians who rejoiced at the government’s removal of the foreign content rule for RRSPs and rushed to in-

vest in the U.S. market are rueful. They have been hit by the double whammy of the worstperforming G7 stock market and a weak currency. (Of course, they do get to hear their stocks hyped breathlessly on CNBC, which may make them feel trés chic.)

That Canada’s stock market was a boring underperformer when Ontario was booming, and is now a global cynosure as Ontario’s outlook dims, illustrates a basic reality: most stock markets are basically driven by their own economies’ performance, but Canada’s reflects the global economy. Those Ontario auto

assembly plants facing shutdowns aren’t owned by Canadians. Few of the pharmaceutical plants that are Quebec’s pride are Canadianowned. Many of the nation’s major utilities are government-owned, and there are few opportunities for private capital in the health care industry.

For 35 per cent of the TSX, economic growth in China is far more important than economic

Canada’s stock market was a boring underperformer when Ontario was booming, and is now a global cynosure

growth—or lack thereof—in Canada. China, with help from India, effectively prices oil, nickel, copper, lead, zinc, and iron ore. (Yes, there are still some people who believe that oil prices are set by Big Oil or even George W. Bush, and there are others who believe they’re set by OPEC. But as long as global demand and supply remain in tight balance, the market, not price-fixers, is in charge.)

This is the decade in which China and India

become the drivers of the global economy. At his installation as chancellor of Cambridge University, Chris Patten noted that, over the past 2,000 years, the combined GDP of China and India was more than 50 per cent of global GDP for all but two centuries. So things are returning to normal. Which means they will never look like the nineties again.

Tough luck, Ontario. For most of the rest of Canada, enjoy the new world. M

Chicago-based Donald Coxe is Global Portfolio Strategist, BMO Financial Group. dcoxe@macleans. ca


Fed up after losing $40,000 to thieves who were knocking over their vending machines, a group of workers from Winnipeg’s VendTec Group Ltd. staked out a notorious snack machine in a downtown apartment block. When a thief broke into the machine, the employees moved in, hog-tying the alleged culprit and alerting police. While waiting for the police to arrive, the employees and Vend-Tec partner Collin Stone posed for pictures with the suspect.