Early Effects of War Boost Hopes For End of Canadian Recession
TORONTO — WAR has been good news for the Canadian economy, so far. Lower interest rates and a lower Canadian dollar - both positive for business growth - followed the outbreak of war in the Gulf.
So did lower oil prices, which while good news for consumers is bad news for oil producers, most of them in Alberta.
``The effect of the war on Canada will be neutral, as long as oil prices stay at about US$20 a barrel,'' says Stephen Jarislowsky, who runs a Montreal-based investment counseling firm, Jarislowsky Fraser. ``Prices of $40 or $50 would be inflationary and be bad for consumers.''
Mr. Jarislowsky says the war may shorten the recession in the United States, and that also would be good news for Canada.
The prime lending rate - charged by banks to their best customers - dropped to 12.25 percent, down half a point last week and down more than 2 full percentage points since last August. The Canadian dollar also dropped lower after rising above 87 cents American in the buildup to the war.
``We have been labeled as a safe haven and a petrodollar,'' says economist Michael McCracken of Informetica Ltd., an Ottawa consulting firm. ``If oil prices are going [below] $20 the dollar will come under pressure.''
A lower dollar would be good news for Canadian exporters.
Toronto's stock market prices rebounded following the early air-war successes in the Gulf, but its rise was not as spectacular as in New York. The reason is that Toronto's index is heavily loaded with gold, oil, and metal stocks; both gold and oil dropped and metals have yet to react.
``A long war would boost metal prices,'' says investment specialist Stephen Jarislowsky. For instance, nickel - of which Canada is the world's largest producer - is used heavily in artillery shells and armor.
But Canadian military spending itself could be a negative, says John Bridgeman, head of corporate finance at Richardson Greenshields, a Montreal investment banking firm. ``The war could have a negative effect on Canada balance of payments,'' he says. ``Almost any replacement supplies will have to be bought from the United States.'' And Mr. Bridgeman points out it could increase Canada's federal budget deficit, which could in turn push up interest rates.