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January 29, 2007
Mr. Travis Sloat
Dear Mr. Sloat:
Thank you for your correspondence of March 3, 2006 regarding the impact of the
recycling of petrodollars by oil producing countries on the U.S. economy and,
potentially, on the Canadian economy. Please excuse the delay in replying.
Recent U.S. current account deficits are larger and more sustained than in the
past. The U.S. deficits are matched by large surpluses in Japan, Germany,
emerging Asia and oil-exporting countries, with oil exporters and emerging Asia
contributing the most recently to the financing of the U.S. economy.
However, a possible reduction in the accumulation of U.S. assets by oil
exporting countries will not signify the collapse of the U.S. economy. Over the
long run, the combination of higher saving in the US., stronger growth in Japan
and Germany, and greater investment in emerging Asia would help resolve global
imbalances while minimizing the negative growth impacts on the U.S. economy.
For its part, the Canadian economy has held up remarkably well over the past
several years despite currency appreciation and other challenges. Aided by low
interest rates, strong employment growth and healthy growth in real personal
disposable incomes, domestic demand supported Canada's growth over the past
three years. With the possibility of further exchange rate appreciation in
response to global imbalances, domestic demand is likely to continue to lead
economic growth in Canada over the near-term.
Achieving an orderly resolution of deepening global imbalances is a key
challenge for the global economy as a whole. For Canada's part, I am confident
that strong macroeconomic fundamentals - notably the shift from budget deficits
to sustained surpluses and the policy of low and stable inflation - have enabled
us to weather economic shocks better than in the past.
Thank you for communicating your concerns.
James M. Flaherty