Impact of U.S. Slowdown on Canada

Mark Weisbrot and his colleagues at the Washington-based Center for Economic and Policy Analysis have just released a report that estimates the economic impact of a U.S.  slowdown on the Americas, including Canada.   

They estimate the impact simply through trade adjustment, assuming in the low adjustment scenario that the U.S. trade deficit falls from 5.2% of GDP in 2007 to 3% in 2010, and to 1% of GDP in the “high adjustment scenario” and that the reduction in imports is shared proportionately among trading partners.  They also assume that oil, oil-related and natural gas exports are not affected. 

 The results don’t look pretty for Canada.  The low adjustment scenario leads to a 9.5% drop in Canadian exports to the U.S., equivalent to a 2.8% drop in GDP.  The high adjustment scenario leads to a 13.5% drop in Canadian exports and a 4% drop in GDP.  And this excludes the impact on oil and natural gas exports. 

This is just the trade impact.   This could clearly cause recession in Canada, particulalry when combined with the impact of the financial market fiasco and any follow-on impacts from a downturn in the housing and stock markets. 

In the summer, Dean Baker at the CEPR did some calculations of the impact of a housing and stock market meltdown for the U.S. economy.  He estimated that the combined impact of the direct effect of the housing contraction, the housing wealth effect, and the stock market wealth effect could cut from 3% to 7% off U.S. GDP. 

 Housing prices in Canada have increased almost as high as they have in the U.S.  My calculations just looking at the wealth effect of house prices returning to long-run trends in Canada are that it could shave about 2% off ourGDP, using a housing wealth effect of 5% on consumption.

2 comments

  • I’ll beat Erin to note that a more in depth examination of this issue would have to take into account the sectoral composition of exports and imports, and the high US import content of Canadian exports to the US. The proportional hit to trading partners assumption of this study doesn’t make a lot of sense to me, if China/Asia gains the most from US currency depreciation. Which is not to say that we will survive a US recession well ..

  • Andrew – please note – China / Asia isn’t gaining the most from the deflation of the U S dollar – the Chinese hold trillions of U S dollars that are depreciating as we write . They are off loading some of those dollars into Euros and have been for almost a year now . The off loading is what is driving up the price of gold bullion .
    The USA is the benefactor of the depreciation as they can pay U S dollar debt in deflated dollars .

    I am an exporter and have experienced a slowdown in sales to U S customers as they “tighten belts ” while gettin ready for the recession that is upon them . I do find oppertunity in other countries , including China and most of South America . I doubt that my company will be worse off in the next year or so , but lumber producers will be , window manufacturers will be , IF they don’t reach out to new markets .

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