Economic Outlook for the US and Canada

The slowing US economy looks like it's having effects farther afield: I was reading just today that analysts in Canada are predicting as much as a full percentage point drop in Canadian interest rates over the next 12 months. Why? To counteract the slow down in the US as well as balance out the impact of the rising value of the Canadian dollar.

The same Canadian analysts have some interesting things to say about what the US Federal Reserve will be doing at the same time. The prediction? Slashing rates! It is one thing that the Fed could do to prevent the current cooling market from becoming a definitive slump.

The trick for all of North America (which has been along for the ride whie the US economy has been making hay) is to manage a soft landing.

I read some interesting predictions for our neighbors north of the border:

1. By the end of 2007, Canada's overnight lending rate could be as low as 3.25 percent.

2. CIBC World Markets, a think tank in Canada, predicts the Canadian GDP growing by 2.5 percent in 2007. This will be marginally faster than the US market, which is predicted to grow at 2.3 percent.

3. The manufacturing sector in Ontario, the manufacturing "heartland" of Canada, could lose as many as 50,000 jobs if the growth slows below 2 percent. The Canadian central bank will have to watch this carefully, and will likely pace interest rates to keep growth high enough to float Ontario.

It's a bit of a waiting game, as usual, to see how the various economic factors play out.

On the US side, there should be more cuts to our overnight lending rate over the next year. The hope is that we'll see a slow down like that of 1995 to 1996, where lower interest rates ensured another half decade of growth before we started talking recession.

We'll have to watch the interplay between our cooling housing market and lower energy costs, if that continues. Perhaps our near term outlook has more positive than negative to it now, than it looked like a couple of months ago.

Michael

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