Is Canada recession-proof?

The U.S. economy is headed into recession this year, if in fact it isn’t there already. But Canada is going to escape, albeit with slower growth. That’s the conclusion of the International Monetary Fund and it has significant implications for investors.

Last month, the IMF published a new World Economic and Financial Survey in which it warns that “the global expansion is losing momentum in the face of the recent financial disturbances”. The Regional Economic Outlook for the Western Hemisphere states that between the fourth quarter of 2007 and the fourth quarter of 2008, the U.S. economy will contract by 0.7 per cent. That will reduce the growth rate for calendar 2008 in the U.S. to 0.5 per cent, down from 2.2 per cent in 2007.

There are only a few paragraphs about Canada in the 55-page document, which focuses almost exclusively on the U.S., Latin America, and the Caribbean. But even though we are almost an IMF after-thought, the comments about the outlook for our country are encouraging.

“Canada’s growth is expected to slow this year as the downdraft from the U.S. economy outweighs solid domestic demand supported by strong commodity prices,” the report says. But we’re going to come out of this a lot better than the U.S. “Overall, growth is projected to decelerate to 1.3 per cent in 2008 and pick up only slowly to 1.9 per cent in 2009,” the IMF concludes.

I found this sentence to be particularly revealing: “One element supporting Canada’s growth, despite the U.S. weakness, is the continued strength in global commodity markets, driven in part by still relatively robust demand forecast for emerging markets.”

Think about that. The IMF is saying that the much-debated decoupling of Canada from the U.S. economy has in fact happened, at least to some extent. Our ability to outperform our southern neighbour this year is going to come down to what happens in countries like China, India, Brazil, etc. As long as they remain in a strong growth mode, we’ll do all right.

The report describes domestic demand as “a key uncertainty” in the Canadian outlook. It credits the easing policy of the Bank of Canada and the tax relief measures announced in last fall’s economic statement for boosting 2008 GDP projections by 0.75 per cent.

“However, domestic demand could be undermined if financial conditions or global commodity prices weaken without an offsetting depreciation in the exchange rate. At the same time, given its strong policy framework, flexible labor markets, and the authorities’ focus on structural reform – including developing measures to boost competition – the economy should be well poised to ride through these cyclical challenges,” the IMF concludes.

In other times, growth projections of 1.3 per cent and 1.9 per cent would be regarded as gloomy. But the bar has been lowered to the point where any growth at all in 2008 will be seen as good news. However, the IMF makes clear that the impetus will come primarily from the commodities sector, and that suggests we should continue to maintain our investing focus there for now.

So don’t sell all your winning commodity positions, despite the recession fears in the U.S. If the IMF forecast is correct, their day in the sun is not over yet.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder member, go here.