Friday, May 30, 2008

Forget Talk Of A U.S. Recession, What About Canada?

Toronto SkylineIn the first quarter this year, Canada’s economy shrank by 0.3 percent, according to Bloomberg. So while all the talk is about a U.S. recession, surprisingly, Canada may just beat us to the punch.

This news came as a shock to me because of how strong Canada’s economy has been, including their oil industry. The biggest problem area apparently was the auto industry. If the auto- and auto-related industries were removed from the, calculations then Canada’s economy would have actually still grown, according to Bloomberg. The biggest importer of Canadian automobiles, of course, is the U.S. and we just aren’t buying too many cars right now. Not only is Canada suffering from the drop in consumer confidence in the U.S., which is the number one importer of Canadian goods, but more importantly, Canada is suffering from their strong currency.

Ever since the Canadian dollar surged against the U.S. dollar, the trade balance between the countries has changed. Canadians are buying more U.S. goods and the U.S. is buying fewer Canadian goods because the U.S. goods are comparatively cheaper thanks to the weak U.S. dollar. Now the Bank of Canada is likely to cut interest rates in response. This should lead to the Canadian dollar dropping against the dollar, as it already has begun to do.

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