OTTAWA - With the U.S. economy apparently heading toward recession this fall, many economists believe Canada may be in the best position it has ever been to withstand the strong headwinds coming north.
Friday brought fresh evidence that the U.S. economy is sinking fast - retail sales and industrial production rising a feeble 0.3 and 0.2 per cent respectively in August - while in Canada, the economy floats above the fray, manufacturing shipments gaining a surprisingly strong 2.3 per cent in July.
The divergent directions of the two economies once thought to be joined at the hip pushed the Canadian dollar higher for the fifth straight day to 97.04 cents US, the highest close in nearly 31 years.
There is normally a lag before U.S. contagion drifts north, but the continuing health of the Canadian economy in the face of consistently disappointing data from south of the border suggests something fundamental has shifted in the relation between the two economies, said Dennis Gartman, who writes an influential daily newsletter on global capital markets from Virginia.
"I think it's quite clear that the Canadian economy is no longer as dependent," he said.
"In the past we used to say if the U.S. catches cold, Canada gets pneumonia. Now it's if the U.S. gets pneumonia, Canada gets a good case of the sniffles, because Canada has diversified and is trading more with China, and Europe and Brazil."
Currently, about 76 per cent of Canada's exports head to markets south of the border, an extremely large number but far less than the 87 per cent slice the U.S. commanded in 2002.
Gartman believes Canada's commodity-driven economy is currently a good fit with growing world demand for the things Canada has to sell, such as crude oil, minerals and grains.
As well, he said: "the world looks with friendlier eyes upon Canada from a political point of view. If they have their choice between the States and Canada, there's a propensity to take more from Canada."
As for those who argue that the high loonie will further decimate Canada's manufacturing base, Gartman points out that industry is no longer the dominant factor in the North American economy.
"Do you know when the high-water mark for manufacturing was in the U.S.? 1943," he said. "It's been in decline ever since."
In a report issued Thursday, Bank of Montreal economist Sal Guatieri listed four factors why Canada will likely be able to weather the storm better than in the past.
Unlike previous downturns, real interest rates remain benign, well under their four-decade norm. Secondly, strong growth in China, India and other developing economies will continue to provide support to Canada's resource sector, even if prices moderate somewhat.
As well, Guatieri notes that corporate balance sheets are in the best shape in decades, giving businesses the flexibility to ride out a short-duration downturn without significant cutbacks and employee layoffs. And the sound fiscal positions of both the federal and provincial governments in Canada allows finance ministers to step in with additional spending or tax cuts if conditions worsen.
"Barring a deep downturn in housing or the U.S. economy, the strong economic fundamentals should keep Canada in decent shape," said Guatieri. "At the least, growth should outperform that of the U.S. in both 2007 and 2008 for the first time in four years."
Not everyone buys the mostly rosy scenario. Andrew Pyle, an investment adviser with ScotiaMcLeod, said business exposure in terms of exports to the U.S., while down, are roughly at the same levels as during the last recession in the early 1990s.
The telling difference today, he stresses, is that the Canadian dollar is at 97 cents as opposed to the mid-80s.
"Canada looks good now, but that's because we're looking in the rear-view mirror," he said.
"Today's strong economy is still living off the robust U.S. economy at the end of last year and first part of this year, when the loonie was not at its current nosebleed heights."
"We have not had to deal with the combination of an overvalued currency and a U.S. downturn in a very long time and I don't think we've suddenly developed the ability to skate through that kind of headwind," he said.
Pyle concedes that his position differs from that of Gartman and Guatieri only in degree. He agrees that a U.S. recession won't necessarily be repeated in Canada, but he says Canada will still get pretty ill if its biggest trading partner catches pneumonia.
