Canada’s economy is showing strength, fuelled by the growth of the technology sector, but Canada’s reliance on commodity sectors could derail this economic growth, warned one analyst.
BMO Nesbitt Burns chief economist Sherry Cooper reported in a Special Edition of her Financial Chartbook (released in February by BMO Nesbitt Burns Economic Research), that the Canadian economy is now very strong and was led this year by Alberta and Ontario. The domestic economy has picked up sharply, reflected in the rise in retail sales and housing starts. The unemployment rate is at a 24-year low (7.6 per cent) and falling. The Canadian dollar is likely to hit US$0.72 this year and even with this rise, however, it will still be below the levels predicted by old economy models of commodity prices and interest rate spreads, Cooper said.
Cooper said intangibles such as talent, intellectual property, brands, customer bases and innovative financial models are of significantly more value than the traditional engines of Canada’s economy.
“As the world fully embraces the Internet age, the old economy is quickly morphing into a new, truly global economy,” Cooper said. “We are moving into an age where intangibles are valued over physical assets.”
Growth in the old-line businesses such as resources and automobile manufacturing will remain relatively muted in comparison to the stellar growth in information and communications technology. The Internet will be to the new economy what the transportation sector was to the old — the backbone of the system.
For example, Cooper reported, the science and technology sector now represents a larger share of the Toronto Stock Exchange than the resource and the bank sectors combined. Never before has technology loomed so large and resources so small. Resources and low-tech manufacturing continue to languish, despite the rise in commodity prices, she said.
“We are living in a world of extraordinarily rapid technological innovation,” explained Cooper. “Canada, however, has fallen behind, as too much of our economy relies on the growth of businesses of the past — traditional resources and low-tech manufacturing.”
Cooper emphasized that Canada must embrace the shift to the new economy and foster an environment that promotes innovation, talent and the creation of intellectual capital. A reduction in corporate, personal and capital gains tax rates, as well as deregulation, is essential to creating a competitive environment. Canada has the highest corporate tax rates in the world and the highest personal tax rates in the G7. This severely disadvantages Canada in the new economy and starves start-up technology companies of the capital they need, Cooper reported.
“We are in the early days of a once-in-a-lifetime period of tremendous economic growth and prosperity,” Cooper said. “The upwave can be attributed to the Internet and the application of computers to the life sciences that drive the forces of economic change.”
Cooper said she believed that recessions will still occur, but they will be relatively brief and moderate. Published quarterly, Cooper’s Financial Chartbook, predicts economic performance in Canada and the United States.
BMO Nesbitt Burns can be reached at www.nesbittburns.com/economics.