Australia and Canada have been the miracle economies that have withstood the global financial crisis and have generated sharemarket returns as high as 10% annually over the past decade. Both countries export commodities and are fueled by rising demand from developing countries.
Canada’s main trading partner is the US. Its other partners are China, the UK and Mexico. However, almost 70% of the Canadian exports are destined to the US, which would lead one to suspect that the Canadian economy has gone through the same ups and downs as the beleaguered US economy. Quite the contrary: the US downturn hasn't spilled over to its closest neighbor, Canada, as of yet, even though Canada exports a significant quantity of oil and lumber to the US. From 1996 to 2009, the US was the primary market for Canadian lumber exports. Although the Canadian lumber market was adversely affected by the meltdown of the US housing market, China has picked up the slack starting in 2009, and currently lumber exports to China surpass exports to the USA. Canada’s exports to Japan have remained fairly constant over the years and are estimated to increase due to reconstruction efforts. Therefore, although off their peak in 2005 of approximately 4300 thousand cubic meters, the lumber export volume is down by only 15% in total, which is not too shabby considering the shape of the US housing market. On the not so bright side, lumber’s price has gradually depreciated since 2004, although it did make a nice recovery in 2010. Lumber lost about 50% of its value since 2004.
Many people don’t know that Canada is the number one exporter of oil to the US, followed by Saudi Arabia, Mexico and Venezuela. Furthermore, Canadian oil exports are double the amount of oil exported by Saudi Arabia. For that matter, Canada is the 6th oil producer in the world with 98% of the Canadian oil going to the USA. The price of oil has doubled and at some point tripled over the last decade. Luckily for Canada, despite the global financial crisis (GFC) the exports to the USA have remained approximately stable.
Canada has another developing country trading partner besides China: Mexico. Over the past 16 years, the trade between Canada and Mexico has tripled, with Canadians benefiting from cheap imports from Mexico and also cheap seasonal labor provided by Mexican migrant workers. About 75% of Canada’s exports to Mexico are manufactured products, including motor vehicles and parts, electronic equipment, and machinery. On the other hand, Canada’s trade with China is diversified among resources, machineries, plastics and chemicals.
On the other side of the globe, Australia’s major trading partners are China, Japan and the US. Unlike Canada, Australia’s exports to its developing country partner are heavily skewed towards resources: iron ore, coal, petroleum and wool, with iron ore representing 80% of the total exports to China. Furthermore, the agricultural and mining sectors account for 57% of Australia's exports, which clearly shows the sensitivity of the Australian economy to commodities prices.
Both Australia and Canada have recovered from the depths of the GFC better than other countries. Canadians steered away from the reckless lending practices that caused the subprime mortgage crisis, and their banking system survived the financial storm of the last couple of years pretty much unscathed. As a matter of fact, currently Canada has the most robust banking system in the world.
Nevertheless, Canada reported a trade deficit equivalent to 1.5 billion CAD in June of 2011. Also, its trade balance has been mostly in the red since mid 2008, which is a phenomenon that Canadian’s haven’t seen since 1976. Furthermore, oil prices have declined by 25% since April, cutting into profits for Canadian oil companies. To make things even worse, Canadian households are now stretched, with household debt at 147% of personal disposable income—higher than in the U.S. Canadian officials are aware of their need to diversify away from the US. The Canadian Prime Minister Stephen Harper was recently in Brazil on a mission to drum up more trade and lessen Canada's dependence on the U.S. market.
Meanwhile, in Australia, recent data showed the weakest conditions in retail over the last 50 years, while manufacturing activity contracted sharply and housing data showed that demand continued to soften.
Let’s don’t forget that Australia reported a trade surplus equivalent to 2 billion AUD in June of 2011. Also, Australia has only a 5% unemployment rate, while Canada has a 7% and the US has 9%. Furthermore, Australia has managed to keep the interest rates high at 4.75%, the highest of the developed countries. Compare this to Canada’s 1% or US 0.25%. Therefore, if necessary, the RBA can cut rates to stimulate the economy. Another fact that points to Australia being in a better position to survive hardship is its debt to GDP ratio of 20% compared to Canada’s 80% or China’s 19%. The recently downgraded US debt has a 92% debt to GDP ratio.
As for Australia’s main partner China, it is also better equipped to go through tough times. As it demonstrated in 2008, China’s one party government can act swiftly and decisively and it has proven to posses the resources to pass another stimulus package if needed. Not the same can be said about the USA.
