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Posthaste: Canada versus U.S. — Which country will suffer the greatest shock in looming downturn?

U.S. reopens air and land borders to COVID-19 vaccinated travellers
U.S. reopens air and land borders to COVID-19 vaccinated travellers

Good morning!

The U.S. is sneezing, so Canada must be on the verge of a cold. Or not. Investors applying that adage to current circumstances might want to hedge their bets, according to a recent report by economists at Canadian Imperial Bank of Commerce.

Avery Shenfeld and Katherine Judge attempted to figure out which economy is in the most trouble based on past experience. The best they could ascertain is that the road is about to get bumpy for both, as the United States Federal Reserve and the Bank of Canada race to contain inflation with higher interest rates, but there are too many variables to determine who is about to endure the roughest ride.

If you’ve got money invested in Canada, that might be good news, given the assumption that U.S. economic pain always feels worse north of the border. “The facts don’t all line up one way,” Shenfeld and Judge wrote in a note on Oct. 3. “But in that sense, they’re supportive of our general conclusion, which is that there’s no strong case to be made that Canada’s higher level of household debt, or its greater weight in cyclical resource industries, implies it faces a greater shock ahead.”

There’s lots of recession talk because central banks around the world are jacking up interest rates in reaction to the biggest inflation scare since the early 1980s. Year-over-year price increases are around eight per cent in the U.S., and the Federal Reserve has made clear that it’s willing to risk a downturn to get inflation back to its target of two per cent. Because monetary policy is a blunt tool, many Wall Street economists assume a recession is unavoidable.

Even though it’s taken as a given that the U.S. exports its economic pain north of the border, there’s no clear pattern for which country is hit the hardest during recessions. Canada fared the worst in downturns in 1990-91 and 1981-82, but the U.S. was the biggest loser in 2001, 1980, and 1973-75 and 1969-70, Shenfeld and Judge observed. The bigger loser this time could be the one whose central bank feels the most pressure to get inflation back to target by creating “slack,” economists’ jargon for unused economic potential that builds when economies perform below their capabilities.

The Fed’s growth outlook is weaker than that of the Bank of Canada, suggesting that U.S. policymakers reckon they will need higher interest rates to get inflation under control. That might allow Canada to post relatively stronger growth over the next couple of years. “The U.S. seems to need a bigger economic crunch to contain its inflation,” Shenfeld and Judge wrote.

Of course, the Bank of Canada may have been too optimistic when it last updated its forecast in July. CIBC revised its outlook in September and now predicts gross domestic product will increase a mere 0.6 per cent this year from 2022. The Bank of Canada, which will revise its forecasts later this month, currently foresees growth of 1.8 per cent this year. So, given all that’s happened this summer, it’s entirely possible the Bank of Canada will revise its outlook lower.

“Add it all up, and there’s not much to choose from in terms of who’s on worst,” Shenfeld and Judge wrote. “Both the U.S. and Canada are destined for at least a two year period of weak growth, or a shorter outright recession, as monetary tightening takes aim at inflation.”

— Denise Paglinawan

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A view of the LNG Canada site.
A view of the LNG Canada site.

CANADA’S SECOND CHANCE On a drizzly stretch of B.C. coastline at the head of the Douglas Channel, Canada’s first natural gas export terminal is taking shape. Already more than 70 per cent complete, LNG Canada could be operational by the middle of the decade and promises to unlock the full economic potential of Canada’s rich gas reserves for the first time. The Financial Post’s Meghan Potkins reports on Canada’s second chance at becoming a global LNG leader. Photo by Meghan Potkins/Financial Post

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  • OPEC+ meeting

  • The Quebec Professional Association of Real Estate Brokers releases September home sales figures

  • The standing committee on access to information, privacy and ethics meets about access to information and privacy system. Caroline Maynard, information commissioner of Canada, appears as a witness

  • The standing committee on transport, infrastructure and communities meets about anticipated labour shortages in the Canadian transportation sector. Officials from the Canadian International Freight Forwarders Association, Canadian Trucking Alliance, and Teamsters Canada appear as witnesses

  • Toronto Regional Real Estate Board releases September home sales figures

  • Today’s data: Canadian merchandise trade balance, building permits; U.S. ADP national employment report, goods and services trade balance, ISM services PMI

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With recessionary pressures on the rise, David Rosenberg and Brendan Livingstone of Rosenberg Research decided to look at which assets have gone the furthest towards pricing in a downturn and which areas of the market still have a ways to go. They discovered that equities aren’t pricing in a recession just yet. But, there is one asset class so far that is. Read their full analysis.

 

 

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The growing gap between insurance payments and payouts worsened this last decade, and Canadians relying on employer benefits could be left filling that gap, especially if they leave their jobs, industry experts say. In the latest instalment of the Financial Post’s Money Milestones series, writer Amy Legate-Wolfe turns the spotlight on the ins and outs of insurance.

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Today’s Posthaste story was written by Denise Paglinawan, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.

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