As The U.S. Economy Droops, It Could Drag Canada Down With It

When Canadian authorities announced that their nation's economy had expanded at a 4.9% annual rate in the second quarter after languishing in recession for a full year, many observers felt the U.S. economy would not be far behind. Relatively strong growth in Canada, one of America's major export markets, so the theory went, would help sustain the incipient U.S. recovery.

Now, however, speculation is focusing on the reverse scenario--that the sagging U.S. economy could drag Canada back into recessionary territory. Already, evidence of a sharp slowdown is growing. Retail sales and home sales in Canada are losing steam, and employment growth stalled in the third quarter. With manufacturing activity falling and monetary growth weak, the government estimates that gross domestic product actually fell 0.3% in August.

Economist Robert E. Mellman of Morgan Guaranty Trust Co., who had expected third-quarter Canadian gdp to rise at a 2.5% annual rate, now thinks the pace could be below 1%. "About the only area of significant strength has been exports," he says, "and signs that growth in the U.S., Canada's key export market, is stalling do not bode well for the Canadian economy."

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