Meltdown math

Pat Bolland, QMI Agency

Your next-door neighbour is a nice guy — not quite a party animal, but knows how to have a good time.

He smokes and drinks — vices you have indulged in from time to time.

You get along famously and often enjoy each other’s company. Two years ago he had a small fire in his house, apparently he went to bed with a few too many drinks under his belt and his cigarette lit.

Just this morning you saw his house was on fire. Your first concern was for him and his family. Your second concern might well have been for your own house.

Sound familiar? It should, because it pretty much describes the relationship Canada has with the United States — and their house is on fire!

Canada and the U.S. have the biggest trading relationship on the globe. The U.S. does import a bit more from China, but exports a third of what they export to us. We’re that close.

The U.S. debt debacle that has smouldered over the past few months has exploded over the past few days into a panic-induced fire.

The three-ring circus of Republicans, Democrats, and the president trying to gain the upper hand in setting the fiscal agenda resulted in an assessment by Standard & Poor’s, the rating agency that played a role in the fire two years ago, that the U.S. just wasn’t taking their debt problems seriously.

Canada’s been through this ourselves. In the early ’90s we had our own debt problems. Spending is a terrible vice and strict fiscal discipline and the GST put out our fire.

That said, the problems south of the border may yet have an effect here.

Our first concern is trade. A large chunk of our exports are in resources — oil, gas, minerals, agricultural products and grains.

If the U.S. economy slows down further, then demand for resources will decline. Witness how quickly oil went from $95 just a few days ago to $77 and you get an idea of the impact of an American slowdown.

Interest concern

One other concern is interest rates. If the American situation results in lenders not accepting historically low returns from their investments in that country, interest rates will start heading higher everywhere — including Canada.

But can Canadians feel a little more secure than our American neighbour? Maybe. We certainly still have our vices; the recent global slowdown got us back into the spending mode.

Infrastructure programs, tax incentives and fiscal stimulus were all needed to help avoid the crushing recession we saw in the U.S.

But we’ve emerged quicker than our American neighbours. In part that’s because, two decades ago, we insisted our banking system act more conservatively. Canadians didn’t over-leverage their homes. In addition, during the past five years, we’ve reduced our dependence on American exports by 11%.

The data we’ve been seeing of late, like housing starts, the best since April of last year, and unemployment sitting at a relatively low 7.2%, should allow Canadians to feel confident that some parts of our economy are in good shape. Conversely, retail trade, flat since the start of the year, demonstrates Canadians are taking a wait-and-see approach.

So we can sit warily watching over the embers south of the border, knowing at least for now, we’re OK.