Will Canada Avoid Recession?

Canada’s economy has grown remarkably during the last few years. But can those years of expansion be stopped by a recession in the United States?

It is estimated that 40 percent of the Canadian economy is export related and the U.S. absorbs three-quarters of it. So far, the growth of eighth largest economy followed the U.S. pattern and in the Q4 of 2007, Canada's economy grew at the slowest pace since 2003. Yet, although the tight trade and financial linkages between Canada and its southern neighbor are significant, a variety of factors may reduce the effect of U.S. downturn.

Indeed, Canada is currently benefiting from a commodities boom.  Nearly 11% of Canadian GDP is accounted for by the production of raw commodities, of which 1/3 comprises crude oil, natural gas and coal,  ½ industrial materials and 1/6 food. As long as prices of commodities are soaring, the profits of the companies in this sector will remain high, stimulating consumption, investment and hiring. Moreover, the real estate market in Canada is in better condition than that in the U.S. Perhaps, because house prices didn’t rise as much as in the U.S.  Furthermore, while residential construction activity has been heavy, vacancy rates, remain below historical averages. Also, subprime lending was never a major part of the Canadian mortgage market and delinquencies have not accelerated. As a final point, interest rate cuts already done by the Bank of Canada and the reduction in national sales tax (GST) by one percentage point by the Canadian government may support growth in coming quarters.

Anna Fedec, analyst@tradingeconomics.com
5/29/2008 2:37:32 PM