FYI | Oct 15 2007
By Chris Shaw
With recent economic data showing the Australian economy to be in good health and soaring equity prices supporting the view the outlook is rosy, CommSec chief equities economist Craig James has decided comparing the domestic outlook to that of a similarly positioned economy is a worthwhile exercise in possibly identifying future trends.
James’s choice was Canada, which makes sense as like Australia the country has enjoyed a strong economic environment in recent years thanks to its natural resources and it is also performing similarly well in a number of economic variables.
One is unemployment, as just like in Australia the Canadian unemployment rate is at a 33-year low, though at 5.9% it falls well short of Australia’s 4.2%. While Australia’s performance has been good in this regard James suggests more can be achieved, as the Aussie gains have fallen short of a number of other advanced countries over the past decade or so.
The respective currencies have also both done well and risen solidly against the US dollar, though here the Canadian dollar has been the star performer. This comes as something of a surprise given Australia has the advantage of both higher interest rates and faster economic growth, its economy expanding at more than 4% currently against 2.5% in Canada.
Australia has also seen its terms of trade increase by more than double the rate in Canada in recent years as Australia has enjoyed greater exposure to the Asian region, while Canada in comparison relies more on the US economy.
Helping explain the difference according to James is the fact Canada has trade and current account surpluses of around 1.8% of GDP at present, whereas Australia is currently running a deficit of around 5.7%. As a result the Australian dollar has underperformed the Canadian currency for the last few years, with indicators giving no clear sign as to whether or not this will continue.
Far closer in performance terms have been the respective sharemarkets of the two countries, James pointing there has been a correlation of 0.98 since March 2003, where a correlation of 1.0 is a perfect fit.
The resources exposure offered in both countries goes a low way towards explaining this match in performance, so the recent divergence between the two markets is worthy of note in James’s view.
Of late Australian shares have outperformed their Canadian counterparts and are now trading at stretched valuation levels in James’s view, which suggests a period of relative underperformance in Australian equities compared to their Canadian counterparts could well be on the cards.
