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Forget China, Here’s the Other Threat to U.S. Growth

Forget China, Here’s the Other Threat to U.S. Growth

  • By Maxwell Gove
  • · August 31, 2015

While financial headlines as of late have all focused on China, important predictions regarding the United States’ largest trading partner, Canada, have largely failed to gather significant attention. Numbers for second quarter GDP growth will be announced tomorrow and are expected to signal a technical recession in the Canadian economy. 

Canada is important to both U.S. imports and exports, but particularly so on the exports side, where Canadian buyers purchased 19% of all goods leaving the United States last year. Given that, it seems probable that an economic downturn in Canada could cause issues in the United States.

Here’s a chart of trade between the United States and Canada, along with the USD/CAD exchange rate,  since January 2014.

U.S. – Canada Total Trade (by month)

us_can_total_trade

Trade in both directions between the United States and Canada experienced a decline in the last quarter of 2014, though both also rebounded somewhat in the first quarter. And though Canadian exports jumped in June (as reflected by U.S. imports), imports (and therefore U.S. exports) have remained flat.

 

Oil plays an extremely important role in Canada’s economy (oil is the largest export category, more than double the runner up), and in its trade with the United States.

U.S. – Canada Oil Trade (by month)

us_can_oil_trade

Canada’s exports have, unsurprisingly, been crushed by the falling price of oil. And while lower prices and less energy dependence might be good news for U.S. consumers, it also means Canadian buyers may find themselves short on cash, putting the U.S.’s largest export market in jeopardy. The Canadian dollar has also slid against the U.S. dollar (in green on the first chart). Given their reduced purchasing power, it’s unlikely that Canadians will begin to buy more American goods. 

If that’s the case, we can probably expect to see repercussions in the U.S. economy. The auto industry is of particular interest — $300bn worth of vehicles have left the United States for Canada since the beginning of 2014. Manufacturers of electrical and mechanical machinery and equipment could also feel the effect of a recession in Canada. 

Declining commodity prices are having an effect on economies around the world, but in most cases, resource-rich countries are important to U.S. imports, but rather insignificant to U.S. exports. So, Americans are able to to take advantage of lower prices without producers feeling the effects of slowing demand elsewhere. In the case of Canada, however, the indirect effects of falling commodity prices may actually come around to harm U.S. businesses. If Canada is indeed in the midst of a recession, Americans should pay much closer attention to their northern neighbor.

 

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