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As western Canada booms, eastern provinces struggle

Keywords: Tags  MSCI, economic forecast conference, BMO Capital Markets, Michael Gregory, competetiveness, natural resources, Michael Cowden

SCHAUMBURG, Ill. — Canada has outperformed the United States since coming out of the 2009 recession, but while resource-rich western provinces are thriving, manufacturing-oriented eastern provinces in are struggling, according to one economist.

High commodity prices since 2003 have proven to be a boon to the Canadian dollar and such provinces as Alberta, which are rich in oil and other natural resources, according to Michael Gregory, senior economist and head of Canadian rates strategy and managing director at BMO Capital Markets Corp. But a strong Canadian dollar undercuts the competitiveness of manufacturers in such areas as southern Ontario, where current high costs make auto assembly plants, for example, less competitive.

"One foot is in the fire. The other is in the freezer. ... On average it’s the right temperature, but it doesn’t feel very good," Gregory said at the Metals Service Center Institute’s economic forecast conference in Schaumburg, Ill.

Competitiveness will remain a difficult issue for Canadian manufacturers, with the Canadian dollar likely to remain near parity with the U.S. dollar for the foreseeable future, he said. And it is not just natural resources that are driving up the value of the Loonie; so are investors who are pouring money into Canada as they seek a "safe haven" for their assets, he said.

While both the United States and Canada are in recovery, it doesn’t feel like it in the United States, Gregory said. Gross domestic product (GDP) growth of 2 to 2.5 percent is sufficient in Canada, where growth potential is less than that in the United States and higher growth rates could cause inflationary pressure, Gregory said. But in the United States, a growth rate of roughly 2 percent won’t be enough to dent high unemployment rates, he said, making more monetary easing from the U.S. Federal Reserve likely—remarks that proved to be prescient Thursday, when the Federal Reserve unveiled another round of monetary stimulus.

Gregory voiced some concern about U.S. government debt levels, noting that the country was coming uncomfortably close to the debt profiles of such countries as Italy, Spain and Ireland. "You don’t want to be playing with those kids," he said.

Still, Gregory argued that the outlook for the United States was hardly dire. The U.S. housing sector, for example, should contribute to U.S. GDP in 2012 as the sector grows for the first time in six years, he said, while Canada’s housing market is likely to contract as the country’s policymakers aim to deflate a potential bubble.

As for other currencies, Gregory said China is highly unlikely to let the yuan float against the U.S. dollar in the near term. "The Chinese want to get there. But their time frame is very, very long," he said.

Gregory also questioned forecasts about the possibility of the eurozone breaking up, noting that other European countries, notably Germany, will likely bankroll a political solution.

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