Canadas Economy to Come Down l

Through three bad economic years, Canada has emerged as an island of relative stability amid the global storm. More Canadians are working today than were working in the summer of 2008. No other major Western economy has done so well. Canada has the lowest debt burden of any G7 country. The turmoil in the Eurozone and the gloom in the United States feel very far away from the stability and prosperity of Canada. Yet Canadians should be warned: Its only a matter of time. You cannot long remain a winner country in a loser region. The same principle applies with nearly equal forces on a loser planet. This week, global markets were jolted by bad news from China: a third consecutive month of decline in its manufacturing industries. International economists have begun to question whether China is not following the U.S. back into recession. A Chinese recession would cut world demand for oil, nickel, wheat, potash and other Canadian commodities. Prices for those commodities have already taken a tumble: Oil has bumped back down to $80 a barrel. As commodity prices go, so go Canadian exports and so goes the Canadian dollar. Yet the decline in commodity prices is actually the lesser threat to Canada. The greater threat comes from the risk of a Chinese financial crisis.

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Heres how the threat uncoils:
As America slips back into recession, American families buy less especially

including manufactured goods from China.

As Chinese manufacturers earn less in the U.S., they deposit fewer dollars in

Chinese banks.
With less dollar liquidity, Chinese banks can finance less asset speculation. With less Chinese asset speculation, all those condominium towers rising in Toronto

and Vancouver will find fewer overseas buyers.

With fewer overseas buyers, prices fall for Canadian housing.

Then arrives the final step, the most lethal. Canadian households are as heavily indebted, relative to income, as their American counterparts were in 2007. Thus:
Declining home prices mean that Canadians may find themselves owing more on

their homes than their homes are worth setting in motion the kind of housingmarket collapse weve seen not only in the U.S., but also in Western Europe. And oh by the way,
If Canadians cannot pay their mortgages, thats very bad news for the banks that

hold those mortgages. Meanwhile of course Canada is also exposed to the direct risks of renewed recession in the United States: Reduced exports not only of commodities, but of all products and services. Canada has done most things right. Canada had better banking policies and better banking practices than other major economies. Canadas finances were in sounder shape than almost anyone elses before the crisis began. Under the strong leadership of Stephen Harpers Conservative government Canadas finances have been better managed during the crisis, too. Canada borrowed less in 2009, and spent more intelligently, than its peers. Canada then started earlier than anyone else on the post-recession rebalancing of its books.

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Yet Canada has also greatly benefited from good luck. Normally, commodity-producing countries suffer more in recessions as Canadians found in the 1930s. To date, the Great Recession of 2008-2011 was an exception to the rule: a global recession marked by high commodity prices. If China slumps, commodity prices fall. The unique post-2008 exception to the rule, recession = lower commodity prices, will meet its limits. In which case, Canadas long run of comparative good luck may also meet some limits of its own.

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