Destination Beijing

The Canadian economy grew at an annualized rate of 0.4 percent in the third quarter, a pace that disappointed analysts but nevertheless marked the first quarterly expansion since the third quarter of 2008. Zero-point-four is still better than contractions of 3.4 percent and 6.1 percent in the second and first quarters, respectively.

Households and businesses led the way out of recession. Consumer spending rose 3.1 percent, led by an 8.1 percent increase in expenditures on housing. Capital expenditures by business grew by 4.2 percent, the first such growth since the fourth quarter of 2007.

Final domestic demand rose 4.7 percent in the third quarter. That overall GDP expanded by only 0.4 percent annualized illustrates the importance of exports to the Canadian economy.

Data from StatsCan indicate exports, which had shrunk in five previous quarters, grew 15.3 percent, boosted by sales of auto-related goods and energy products. But import growth of 36 percent outpaced this gain. Net exports trimmed an estimated 5.3 percentage points off GDP growth.

Almost all the growth happened in September after output was flat in July and August; this, in addition to October’s strong housing numbers, suggests fourth-quarter GDP will be strong enough to satisfy expectations. But whether the Canadian recovery pales in comparison to previous recoveries or eventually warms up still depends on what happens in the US.

Americans are becoming thriftier, and goods they may have bought from Canada are getting more expensive. These mutually repellent forces are likely to persist for some time. There’s a lot of de-leveraging left to be done, and the days of cheap-and-easy oil are over.

Although Americans are no longer the world’s consumer of last resort, there are potential and emerging middle classes in several Asian countries. Demand from these economies will support commodities prices over the long term, boosting the Canadian dollar.

But Canada is working to diversify its export base. Harper departs today for Beijing, Shanghai and Hong Kong. He’ll conclude his trip to Asia with a stopover Dec. 6-7 in South Korea, where he’ll become the first Canadian prime minister to address the South Korean national assembly.

But this is all about the Middle Kingdom. Business relationships in or with China begin with politics; the most important thing about this visit is the visit itself, so long as Harper’s and succeeding Canadian governments sustain the engagement. If after Harper returns to Ottawa we see the same volume of two-way, high-level-minister traffic we saw leading up to it, we’ll know current leadership takes seriously Canada-China trade and investment.

One key point often mentioned in the media these days, with regard to President Obama’s early November visit to China as well now to Prime Minister Harper’s impending trip, is the issue of China’s currency and its macroeconomic policies and how they perpetuate global imbalances.

One particularly vocal school holds that allowing the renminbi (RMB) to appreciate is the sine qua non of global rebalancing. But, as far as the US is concerned, with a Chinese trade balance in excess of USD260 billion, currency appreciation can only have so much impact.

According to one estimate, a 20 percent RMB appreciation would lead to an approximately USD90 billion reduction in the Chinese trade balance. This leaves a large Chinese trade surplus in place, around USD170 billion even before the rebound in the Chinese surplus anticipated as global aggregate demand recovers.

This media and political obsession with “currency manipulation” obliterates the fact that rebalancing requires, first, a series of difficult actions by US authorities, both fiscal and monetary, and American consumers. Balanced budgets--government as well as household--and a return to traditional money are good starts.

During a briefing ahead of Harper’s trip, spokesman Dimitri Soudas wouldn’t say whether the prime minister will broach the currency peg topic. “But it is expected,” Soudas added, “that the prime minister, in the wide range of meetings that he’ll be having, there will be exchanges related to fiscal policy.”

This final point is critical. At least as important as the currency issue is that Chinese authorities must increase and re-orient their fiscal stimulus efforts toward boosting domestic private consumption. A social safety net would go a long way toward encouraging private consumption, and it would also keep average Chinese content, not a minor consideration to a single-party, authoritarian state.

Reconciling the imbalances characterized by the “Chimerica” relationship is critical to putting the global economy on a sustainable track. This means, in short, that the US must consume less, China more. But China’s economic program, including the USD587 stimulus announced in November 2008 and implemented to great effect in 2009, to date has focused almost exclusively on developing its export potential.

The currency issue is significant: Allowing the RMB to appreciate will spur the development of a consumer economy in China--if stimulus efforts support the creation of more value-added jobs, and if there’s a social safety net to encourage private consumption.

Reestablishing and maintaining robust bilateral political and trade relationships with Asia, and China in particular, is the long-term key to growing the Canadian economy. China is already Canada’s second-largest trading partner after the US. Two-way trade totaled CAD53.1 billion in 2008. Through the first half of 2009 it stood at CAD24.7 billion, a 2.9 percent increase over the same period last year.

If the argument is that Harper’s four-year delay before meeting his Chinese counterparts caused problems for Canada, this increase suggests even a little effort will help the Great White North reduce its exposure to the US economy.

As for short-term benchmarks, look for announcements that China has conferred “approved destination” status on Canada within weeks and that President Hu Jintao or Premier Wen Jiabao will visit Ottawa.

A simple case, one we’ve been making for months here and in Canadian Edge (the place for actionable advice), is that Canada’s domestic economy is essentially sound, that it must diversify away from the US and that Asia is its demand center of the future.

Stephen Harper is off to make it happen.

Black Friday: A Retrospective

The 2008 holiday season was pitched as the Consumer’s Apocalypse, and the market seems to have priced in an economy capable of generating more than a 0.5 percent year-over-year improvement over the worst-case scenario. Although the number of shoppers was up in 2009, the amount they spent (on a per-capita basis) was down. Online surveys show that the average consumer spent USD343.31 versus USD372.57 last year.

This is further confirmation of what’s shaping up as a secular trend toward frugality, which our colleague Benjamin Shepherd discusses in the December 9, 2009 issue of Personal Finance (available online Saturday morning).

Words for the Wise

“Where is it that we have had very vocal, remonstrative theatrics with China on thorny issues where China has laid down and simply done what we want to do simply because we’ve gotten loud about it? There are not a lot of examples you can point to.” -- Howard French, former Shanghai bureau chief for The New York Times, in the second part of a two-part interview about media coverage of President Obama’s recent trip to Asia. The first part of the interview is here.