Photographer: Scott Eells/Bloomberg

Uh-oh, Canada. China Pales as a Risk to U.S. Growth

The U.S. neighbor to the North could cool off momentum

Canada probably experienced a technical recession in the first half of 2015, and the fact that the No. 1 U.S. export market is in a slump could spell bad news for growth in the world's biggest economy. 

Canada's gross domestic product contracted for a second quarter in the three months through June, a Sept. 1 report will show, according to almost all economists in a Bloomberg survey. The economy probably shrank by 1 percent, even worse than the 0.6 percent first-quarter drop. 

"When Canada hurts, U.S. exporters do, too," Bricklin Dwyer, an economist at BNP Paribas in New York, wrote in an Aug. 27 note to clients titled "Canada (not China) matters more."

Economy-watchers and investors have been spooked by fears of a worse-than-expected Chinese slowdown after the nation devalued its currency Aug. 11 in a surprise move. Yet the direct effects on U.S. trade from slowing Chinese growth and the yuan move are probably fairly contained — far more so than the potential fallout from faltering Canadian demand.  

Canada counts for 19 percent of total U.S. exports, followed by Mexico at 16 percent, each more than double China's 7 percent share. And the Canadian dollar is sliding much faster: It has fallen about 12 percent against the U.S. dollar since the start of the year, while China's yuan has dropped just about 3 percent. 

"The Canadian dollar has depreciated sharply against the USD by multiples of what we have seen'' from China, Dwyer wrote. 

That's not to say that economy-watchers and the Federal Reserve should brush China's dimming outlook aside. As Federal Reserve Vice Chairman Stanley Fischer said in a CNBC interview from Jackson Hole, Wyoming, on Friday, "there are a lot of countries influenced by trade with China."

"The question is whether interactions with those countries would amount, jointly, to something that would have an impact on us," Fischer said.