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Canada Prepared For U.S. Recession

Tonight I came across an article in the National Post (Canada) entitled “Riding Out Global Gloom,” which claims that Canada is well-positioned to withstand a U.S. recession. According to Jacqueline Thorpe, the author of the piece:

The economic gloom deepened yesterday as the United Nations warned of the risk of worldwide recession, Goldman Sachs became the latest observer to forecast a U.S. contraction, shares of European retailers plummeted on fears a consumer retrenchment would cross the Atlantic, and safe-haven gold touched another record high of US$891.40 an ounce.

But amid the pessimism one economic stalwart stands out: Canada.

Ms. Thorpe referenced a Merrill Lynch forecast:

In an indication of just what this country has going for it, the same investment bank that said on Monday the United States was already in recession, predicted yesterday Canada would pull through with “the best relative performance … in modern times.”

David Wolf, Merrill Lynch’s Canadian analyst, forecast Canadian real GDP would trough at 1.3% year-over-year in the third quarter, down from 2.9% in the fourth quarter of 2007 and a nearby peak of 3.6% in the first quarter of 2006.

In the past, the Canadian economy fell victim to the same economic ills as its neighbor to the south:

In the 2001 U.S. recession by contrast, Canadian growth fell to just 0.7% from the cyclical peak of 5.9% in the fourth quarter of 1999. And history has been much less kind, with Canada suffering interminably during the early 1990s recession as the U.S. economy bounced back.

Indeed, in the six previous recessions of the past forty years, Canada has followed suit four times (1969-70 and 2001 being the exceptions), Mr. Wolf said. The average peak-to-trough drop in real GDP was 6.7 percentage points.

The Joke’s On US
Courtesy of BustedTees.com

Why is Canada better off this time around? The Merrill Lynch analyst points out that the Canadian housing market is healthier than its neighbor’s, “as activity and prices are still rising and, crucially, owner’s equity, which could be tapped for spending, exceeding 70% as opposed to around 50% in the United States.” In addition, while employment and wage growth would probably slow, Canadian consumers are in better shape, with Wolf predicting 3.9% consumer spending growth in 2008. Avery Shenfeld, senior economist at CIBC World Markets, told the Post that:

We have higher levels of employment; we have rising wage rates, rising house prices, so our consumer sector has no reason to do anything but shop.

Shenfeld is forecasting 2.7% growth for Canada this year.

On the flip-side, the potential for flattening commodity prices may affect Canadian exports, as will the strong Canadian dollar. Yet, the loonie’s strength will keep import prices cheap for the Canadian consumer, and “will keep a lid on inflation, giving the Bank of Canada the wiggle room it needs to cut interest rates,” according to the Ontario-based publication. Merrill Lynch’s Wolf predicts that Canada will move to a current account deficit of $10 billion in 2009 from a $14 billion surplus in 2007 as imports surge.