Can Europe help lift Canada out of the economic doldrums?

OTTAWA -- Canada's economy has looked anything but world-beating during the first half of this year, but economists say the restraints that have handcuffed exports and jobs growth are beginning to break.

The biggest confidence booster may have been the news last week that the troubled Eurozone burst out of a prolonged recession earlier than expected, posting a modest but still significant 1.1 per cent annualized expansion in the second quarter.

As CIBC chief economist Avery Shenfeld noted in a brief to clients, with Canadian exporters fixated on the United States and China, it's easy to ignore the potential good a resurgent Europe could bring.

" 'Viva Europa' is admittedly too strong a rallying cry for now," he said, but Canadians should be cheering nonetheless because the continent's malaise was felt on this side of the Atlantic as well.

Representing only about nine per cent of Canadian exports, shipments to the continent nevertheless fell 21 per cent from the end of 2011, accounting for more than 70 per cent of the fall-out in Canada's exports during that period.

"(So) swing the hammer hard enough at your little toe, and you can still feel a lot of pain. Europe is also significant in determining global prices for Canada's resources," he added.

Shenfeld calculates that recovering European markets will lift Canadian exports by two per cent, not an insignificant amount. And given Europe's importance as a market for Chinese goods, a recovery would also likely boost demand for Canadian commodities in the world's largest emerging economy.

David Madani of Capital Economics cites Canada's aerospace industry as a big beneficiary from a recovered Europe, which, he said, could support business investment and employment.

On the negative side, a financially secure Europe would likely lead to higher bond yields in Triple-A rated Canada as the country loses some of its "safe haven" appeal, resulting in higher interest rates, Shenfeld said. Still, the overall boost to confidence would more than make up for any downside.

Europe is not the only reason for optimism. Scotiabank economists pointed out that recent rebounds in retail and housing in the United States, as well as manufacturing, point to a stronger second half south of the border, where about 70 per cent of Canadian exports land.

In addition, Japan posted a 2.6 per cent annualized growth rate this spring, while the United Kingdom's growth came in at 2.4 per cent, leaving well behind fears of a triple-dip recession there. By contrast, Canada's second quarter is expected to come in at about 1.5 per cent when the data is released at the end of the month.

Back to Europe, the Scotiabank economists -- Aron Gampel, Adrienne Warren and Erika Cain -- noted that, in the past, Canadian exports across the Atlantic accelerated dramatically during recovery periods, jumping 14 per cent annually between 2003 and 2007, and 16 per cent annually in 2010 and 2011 in the immediate aftermath of the most recent slump.

"The improving economic conditions currently in the EU point to a renewed uptick in the value of Canadian exports if the new-found economic momentum is sustained and commodity prices remain at profitable levels," the analysts said, putting the potential gross domestic product gain for Canada at 0.2 percentage points.

Two-ticks of a point is not large, but in an economy anticipated to grow at sub two per cent for the second consecutive year, it represents a more than 10-per-cent improvement in the growth rate.

Shenfeld cautions Canadians shouldn't expect a "straight-line" expansion or exceptional numbers going forward, but believes the soft patch in the economy that began in the third quarter of 2012 and continues to this date -- underscored by July's 39,000 jobs loss -- may be nearing an end.

While he is bullish on China, the U.S. and to a lesser extent Europe in 2014, he still believes Canada's growth rate will be held back to about 2.4 per cent next year, below the Bank of Canada's call for 2.7 speed.

That's because while momentum is building in Canada's major export markets, domestically the situation is not as encouraging. Governments continue to pull back on the spending reins and consumer debt remains high, suggesting household spending on cars, appliances, clothes and homes will be kept in check.

"But given where we are in the cycle, which is ahead of the U.S. and Europe, a 2.4 per cent growth rate is more acceptable than it would be in the U.S.," Shenfeld pointed out.