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.Â slowdown on the Americas, including Canada.Â Â Â
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.Â They also assume that oil, oil-related and natural gas exports are not affected.Â
Â The results don’t look pretty for Canada.Â 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.Â The high adjustment scenario leads to a 13.5% drop in Canadian exports and a 4% drop in GDP.Â And this excludes the impact on oil and natural gas exports.Â
This is just the trade impact.Â Â 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.Â
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.Â 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.Â
Â Housing prices in Canada have increased almost as high as they have in the U.S.Â 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% offÂ ourGDP, using a housing wealth effect of 5% on consumption.