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April economics

 

Hopes rise following Quebec election

Positive data accompany solid defeat for separatists

 

A funny thing happened during the days following the defeat that voters inflicted on Pauline Marois’ Parti Quebecois government in Quebec’s elections early this month. Both Canadian stocks and the dollar shot up, as markets demonstrated tangible relief that the separatist threat had, as pundits were saying, been “put to bed” for some time.

 

Although both indicators pulled back in subsequent days, the initial positive relief provide an excellent reminder as to the premium that investors put on uncertainty – even here in Canada, which has been dealing with the separatist threat for almost four decades.

 

The defeat of the Parti Quebecois, coincided with several other positive indicators which bode well for the Canadian economy. For one the country created an impressive 43,000 jobs during March, which brought the unemployment rate down to just 6.9 percent. The United States, the biggest buyer of Canadian export goods also did well, adding 192,000 posts. This performance, which comes on top of strong January (+144,000) and February (+197,000) numbers, suggests that American consumers will have more money available to spend, which in turn should provide further strength to Canadian businesses.

 

As if that were not enough the Toronto Stock Exchange benchmark index gained an impressive 5.6 percent during the first quarter, before dividends. This increase was due in large part to a rebound in commodity prices, particularly gold, because Canadian equities indices are heavily natural resources weighted. This rise in raw materials prices also boosted business’s revenues and earnings and drove up the loonie by almost four cents, which in turn boosted Canadians’ buying power even more.

 

Many Canadians barely cast a sideways glance at rising stock prices having left the markets following the crash of 2008 to 2009. However recent strength in equities has had major, though largely hidden benefits. That’s particularly true for the many Canadians who own pension plans. The market downturn had thrown many of those plans into deficit. As a result based on projections back then, they lacked sufficient funds to pay out the benefits promised. Recent rebounds in prices put many of those plans back in the money.

 

Even more important though is that rising stock prices tend to act as an advanced indication of future economic activity. If that is true, then we can expect that consumer spending will increase during the coming quarters and businesses will increase their investments in capacity to meet the rising demand.

 

The recent good news could not have come at a better time. In mid-April the Bank of Canada revised downwards its 2014 Canadian gross domestic product growth projection, due in part to weather related issues. The central bank also kept its policy rate at an extra low 1.0 percent to further stimulate economic activity. 

 

As for the separation issue, the longer term news may not be as good as some analysts think. Although the party did record its worst voter percentage in almost 40 years, the lost votes did not go to federalist alternatives. Most went to the Quebec Solidaire party which is even more hard line on separation. And swing votes went to the highly nationalist Coalition Avenir Quebec. In short, there remains a strong real, but latent contingent of nationalist and separatist voters that are available to coalesce around a winning cause or issue.

 

So while investors can rejoice and put this issue to bed for now, over the longer term it may pay to sleep with one eye open.

 

peter@peterdiekmeyer.com

 

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