Canada is not immune to U.S. slowdown

Slow down, don’t move too fast; we’ve got to make the money last — particularly since a new economic forecast, released today by TD Financial, says Canada’s economic slowdown is on par with our southern neighbour’s economic downturn.

The projection by TD economists shows that Canada’s slowdown is occurring at the same time and to the same extent as the downturn in the United States. The report also predicts that Canada’s real GDP growth will be a “dismal” 1.1% this year — analogous to the slow growth predicted for the U.S in 2008.

Thankfully, there is good news. While dismal growth will hover “just above the line” in 2008, according to Derek Burleton, assistant vice-president and senior economist at TD, Canada’s GDP will grow moderately to 1.8% in 2009.

Canada’s saving grace is our strong dollar, explains CIBC’s March issue of the Weekly Market Insight.

“The Canadian dollar is clearly helping the inflation situation in Canada,” says Benjamin Tal, senior economist at CIBC.

In the short term, however, Burleton predicts a slightly negative first quarter for Canada in 2008.

“The economy is cutting it pretty close to the line in the first quarter, and there is virtually no change in GDP in the first half of 2008,” said Burleton. “At a 0.2% annualized growth rate in the first quarter, there is not a lot between growth and contraction.”

Yet the real issue for Canada, according to Tal, is “accelerating inflation and higher interest rates.” As such, he does not believe the Bank of Canada will take any chances, particularly since higher inflation is anticipated for 2009. Tal predicts a 50 basis point cut in the next Bank of Canada move.

Despite the doom and gloom predictions for the first half of 2008, Burleton believes there are “tepid rebounds [to be] expected in the second half of the year.” He explains that this growth will be bolstered by the kick to the U.S. economy offered by the government’s economic stimulus package. “In the short term, [the stimulus package] will boost their export side. [As a result] things will improve moderately after mid-year.”

Still, despite the upswing, Burleton is confident that the sluggish ride is not yet over. “Some of the implications are that short-term interest rates will fall quite a bit,” he said, adding, “Government bond yields will be anchored at relatively low yields, and this will probably result in a lot more action on the part of the Bank of Canada.”

Thankfully, there is wiggle room for the banks. “The economy is pretty good on the domestic side; while domestic spending is not immune [to current market volatility], and the risk brewing on the export side will eventually prompt a slowdown in domestic spending and in the job market, [this wiggle room] will allow the Bank of Canada to take advantage to cut rates,” said Burleton.

The Bank’s rate currently stands at 3.5%, but Burleton predicts it will fall to 2% by the third quarter of 2008.

For Canadians, the impact of a sluggish first and second quarter will largely depend on what geographic region one lives in, said Burleton. “The West will likely see a slowdown, but not to the same extent as central Canada — a region that depends [much more] on the U.S.”

Burleton also believes the slowdown will have a mixed impact on commodity prices — an area Canada is heavily invested in given our strong resource base. “Prices will likely pull back, on average, particularly for oil and base metals.”

Despite the “tough slog,” Burleton is optimistic that there is light at the end of the tunnel. Over the next year, the concerns of the U.S. banking system should be cleared up, even if the housing market doesn’t stabilize and consumer spending continues to struggle.

“There’s some end in sight in 2008, even if we are still dealing with the aftermath.”

Originally published on Advisor.ca on March 19, 2008