Could Canada Follow US Economic Decline? This is what the experts say – National

Could Canada Follow US Economic Decline?  This is what the experts say - National

Call it a tale of two economies: The latest figures from Statistics Canada on Friday showed that economic growth in the country slowed but likely avoided a downturn in the first half of the year, just as the U.S. United recorded its second consecutive quarter of daily contraction. before.

The economies of the two American neighbors have long been intertwined; Both countries have recently been rocked by decades of high inflation and rising interest rates as central banks push to curb rising prices.

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Both Canada and the United States have seen manufacturing output slow, dragging down real gross domestic product last spring, and housing markets on both sides of the border have cooled significantly in response to the ‘increase in rates.

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Economists say the main difference lies in the pace of the two economic recoveries from the COVID-19 pandemic. But as recession rumors grow louder south of the border, Canada’s economic fate could be tied to the U.S.

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Canada’s recovery and decline lagged behind the United States

Consumer spending is an important part of both the Canadian and US economies, notes Beata Caranci, chief economist at TD Bank.

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But the consumer side is an even bigger part of the US economy, he tells Global News, making the slowdown in demand even more apparent in his GDP results.

The United States also began its reopening cycle much earlier from the COVID-19 pandemic, as the country had a faster rollout of the COVID-19 vaccine and eased restrictions earlier.

Carrie Freestone, an economist at the Royal Bank of Canada, says the Canadian economic recovery is still moving forward this summer as consumer demand for air travel and dining out, for example, remains strong.

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When that demand slows, as Freestone expects it will in time, as rising interest rates bite into household budgets, Canada’s consumer spending trends could fall back in line with its neighbor in south

“I don’t think it’s necessarily a divergent path. I think it’s just that we have a lot more demand from that pent-up service sector demand in Canada that’s being released,” he tells Global News.

“I think Canada is definitely behind the US”

While US GDP weighs more heavily on consumer spending, Canada’s economy is more exposed to the housing market, Caranci notes.

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As a result, Canada could feel an outsized impact on its GDP, as most economists predict a continued housing correction in the fall.

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Meanwhile, some global forces could boost the Canadian economy, notes Stephen Brown of Capital Economics.

He notes that while commodities have experienced “pretty broad-based declines recently,” oil prices are still holding up, which is a boon for Canada’s energy sector.

“And that’s more beneficial to the Canadian economy than the U.S.,” he says.

Would Canada Follow the US in a Recession?

News that the United States posted two straight quarters of negative growth was met with rapid debate over whether the threshold for a technical recession has been reached, with most US officials playing down the talk.

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The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that extends throughout the economy and lasts more than a few months.”

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If the U.S. does eventually fall into recession, Caranci says it will be difficult for Canada to achieve its own “soft landing” because the same forces will act on closely linked economies.

Both countries are facing rampant inflation caused largely by global forces, such as supply chain delays and the war in Ukraine, and are responding to these challenges with aggressive interest rate hikes.

While Caranci notes that there are “nuances” in how government policies are guiding their respective economies through a pending recession, it would be difficult to end up with a different outcome.

“You’d have to come up with a logic as to why an interest rate shock would hit Canadians less than the US and an inflation shock would hit us less than the US and I don’t think there’s a strong argument,” he says.

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RBC forecasts mild recessions in both the US and Canada for next year. Freestone says the US could slip into recession by the end of the year, with contractions in Canada coming in the second or third quarter of 2023.

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While noting that Canada doesn’t always follow the US into recession (2001 being a recent outlier in that regard), Freestone agrees with Caranci that Canada can’t necessarily escape the pressures that stifle the American economy.

“The forces at play in the US that will cause a recession are also forces at play in Canada and many of those forces are beyond our borders,” he says.

All the economists who spoke to Global News said they expect the latest Canadian GDP report, which came in slightly above the Bank of Canada’s forecast, will not deter the central bank from raising interest rates in its next decision on September 7. predicts another outsized rate hike to take the bank’s policy rate to three percent or more.

Caranci says that even if Canada and the US are on similar economic paths, the “depth” of any recession might not be the same. He notes that the US saw a historic jump in spending on durable goods during its last economic recovery, a trend that Canada did not follow.

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He argues that distinctions like this could put the US at greater risk of a correction than Canada.

“So keep in mind that the trajectory may be the same, but the magnitude may be different.”

— with files from The Associated Press

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© 2022 Global News, a division of Corus Entertainment Inc.

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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!