Is There a Silver Lining for Canadians, as Recessionary Pains Hit North America?

As the U.S. economy braces for the worst that the bad-credit- induced recession has in store, Canadians are bracing for some pains of their own. After all, the U.S. is our largest trade partner and weakening demand for our goods and services south of the border will have an adverse impact on our economy, too, no ifs and or buts about it.

Is there a silver lining somewhere here for Canadians? There is a growing consensus among economists in Canada that an economic slowdown in the U.S. and overall falling price levels will result in greatly reduced interest rates in 2008 on both sides of the border. And while borrowers in Canada are likely to enjoy decreased housing loan payments, for example, promises of interest-rate cuts still mean the same thing — prepare yourselves for an economic slowdown and/or a recession.

There was an interesting statement made by economist David Wolf of Merrill Lynch Canada in yesterday’s “Globe and Mail.” Wolf said that, “Canada is destined to play a primary role in global economic rebalancing away from American demand, given its proximity to the U.S., its openness to trade and its strong currency.”

The article in which this quote was made did not elaborate further on this statement, but continued with near-term forecasts for Canada’s GDP growth, or rather the lack thereof, potential current account deficit, interest-rate cuts and cooling inflation. All of which I agree is likely to happen in Canada, as the supply/demand curves are thrown off their equilibrium.

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What interested me more was Wolf’s hint at how the supply/demand imbalance might resolve itself and regain long- term equilibrium. The key factor throwing a wrench into Canada’s economic growth wheels appears to be the weakening demand from the U.S., our largest trade partner. Considering the dire economic situation south of the border, we are not likely to see renewed strength there anytime soon.

To illustrate, consider the outlook offered by Goldman Sachs, whereby real GDP in the U.S. is expected to contract by one percent on an annualized basis for at least the first three quarters of 2008. For the entire 2008, Goldman Sachs expects GDP growth of only 0.8% and an increase in the unemployment rate from five percent to 6.5%,

With the U.S. significantly out of play, what is the Canadian economy to do, so to speak? Well, as Wolf suggests, the timing is perfect for Canada to turn to the rest of the world, assert our strong, resource-based economy and our strong currency in international markets, and return the demand/supply to equilibrium by emerging not as the timid neighbor to the U.S., but as an economic force to be reckoned with.