How the Domino Effect May Still Reach Us in Canada

Experts say it has been some time since both Canadians and Americans have experienced a recession. Since the early 1990s, our respective economies have been flying high, which may explain why people seem to have been ignoring the eerily similar parallels to the recession that hit North America in the late 1970s.

At the time, we also lived through high oil prices, through crises in the Middle East, inflation and weak domestic currencies. Furthermore, overall output was on the decline, Americans could not save if their lives depended on it (as they did), and unemployment hit its highest rate since the Great Depression. As inflation raised its ugly head higher and higher, the Fed tried to contain it through rising interest rates, which resulted in interest rates on mortgages soaring to an average rate of 15%!

Thankfully, the “cavalry” was just around the corner, which probably explains why that particular recession was so quickly forgotten. What spearheaded the recovery was North America’s enormous demand for homes and cars. At the time, it seemed insatiable, which — metaphorically as well as literally — installed turbo engines in the economy on both sides of the border.

However, this is also where the parallels between the recession of the late 1970s and today end. Today, Americans have had enough of homes and cars. Statistics demonstrate that, for the past five years or so, they have bought nearly everything they could get their hands on. Unfortunately, Americans didn’t have exactly the money saved to pay for their exorbitant spending habits. So, Americans put their purchases on credit. And that has proved to be the root of all evil.

Canadians are not yet worried about what has been going on south of the border, although many experts believe it is foolish and naive not to be. The reasons why Canadians can more or less ignore the economic events unraveling in the U.S. are high commodity prices, strong currency and the fact that Canada is a net exporter and not a net importer like the U.S.

However, will strong fundamentals be enough to carry us through the storm brewing south of the border? Expert opinions seem to be divided on the issue. Some expect the loonie to reach US$2.00 by 2009, while some warn us about the fact that U.S. is Canada’s largest trading partner.

Our economy has already been adversely impacted by economic weaknesses south of the border. Canada’s manufacturing has already lost hundreds of thousands of jobs. The forestry industry no longer finds it profitable to sell in the U.S. According to Statistics Canada, for the recent quarter, the sector shed forty-five million dollars in revenues. Some economists are going as far as to say that without Alberta, Canada, in fact, would be in a recession of its own, just like the U.S.

This is also the point where the whole mess could go global. Currently, North American exports from the emerging markets account for about 40% of total exports in China and India. Meaning, the world economies, and particularly emerging economies, still depend heavily on North America’s buying power. Should there be a decline in consumer spending in the U.S., as there very likely will be, we could be talking not just about a global slowdown, but about an economic “storm” of epic proportions.

If and when this happens, Canada is very unlikely to get out unscathed. Whether we like to admit it or not, Canada’s economy is highly dependent on Alberta’s oil boom. If worldwide economies even switch to a slower gear, oil prices will be the first to turn downward.

Unfortunately, to extract the oil from Alberta’s oil sands, it costs serious money, which is why the region needs the prices to go up, not down. And there goes our competitive advantage that everyone has been boasting about in the past few weeks. In my humble opinion, the domino effect is more likely than not to hit Canada, and hit it hard, too.