Picking the IMF’s Brain

In previous columns, I’ve written about how and why I believe timelines and exit points from the current economic downturn enveloping North America should be moved further out. Apparently, the International Monetary Fund (IMF) “feels” the same way. The basis for the IMF forecast is the potentially longer- than-expected unraveling of the credit crisis in the U.S., shrinking credit and capital supply, and weakening of the U.S. greenback, all the while the Canadian loonie is expected to retain its strength in the coming months.

In October of last year, Canada’s central bank forecasted that the country’s GDP growth rate would achieve 2.3% for 2008. However, when the IMF did its own calculations, it slashed the country’s growth rate to 1.8%, which would be the lowest growth rate since the aftermath of the tech bubble bursting back in 2001.

True, the Canadian economy has demonstrated resilience and performance in recent years, particularly in 2004 and 2006, when it grew 3.1% and 2.8%, respectively. Such growth rates were predominantly carried on booming commodity prices, low unemployment and strong domestic demand. But, that momentum may finally be exhausted in 2008, as the doom and gloom in the U.S. economy takes over.

Investors on both sides of the border are not going to like this. It used to be that when the U.S. sneezed, Canada caught the cold. But as the two economies diverged in recent years, investors at least had the flexibility of enjoying the commodity boom in Canada and buying stakes in companies reporting revenues in the stronger Canadian dollar versus incurring expenses in the weaker U.S. dollar.

Advertisement

However, it is becoming more and more obvious that the recession’s grip on the U.S. economy is going to be more severe than what was assumed earlier, say in October of last year. Coupled with the strong loonie, tallying up the real net exports is not going to be pretty for anyone investing in Canada.

In past articles, I’ve also tried to point out why would it might be a good idea for the two economies to at least try to decouple. Not as a matter of some abstract national pride, but rather as a matter of economic prudence and of having more choices, both for Canadian and American investors. But the fact remains that the strength of trade and financial links between the two countries is unlike anything in the industrial world. Canada might not be catching colds anymore when the U.S. sneezes, but the U.S. isn’t sneezing these days either. Rather, it is having serious respiratory issues, the ripple effects of which are spreading fast and furious.

The IMF opinion has struck a chord with the Federal Finance Minister Jim Flaherty, too. He said something along the lines that the Canadian economy has the flexibility to adjust to shocks, but that, “The question all of us face in 2008 is how to secure our future prosperity in these challenging economic times.”