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Canadian economy likely to overcome U.S. sub-prime crisis

Toronto, ON -- Canadas economy should emerge without serious damage from the U.S. sub-prime debacle -- if the U.S....


Toronto, ON — Canadas economy should emerge without serious damage from the U.S. sub-prime debacle — if the U.S. economy can stay out of recession — according to a Conference Board of Canada analysis.

The combination of the strong Canadian dollar and slowing U.S. growth will decrease exports in sectors such as wood products and automobiles, but the Canadian domestic economy remains robust and should offset declines in exports, said Kip Beckman, Principal Research Associate and author of The U.S. Housing Market Meltdown: Implications for Canada. In addition, most Canadian banks have limited direct exposure to the sub-prime mortgage market, and should be able to weather the storm.

The ongoing turmoil in U.S. housing markets, a result of the collapse in sub-prime mortgage markets, is expected to continue until at least the autumn of 2008. The negative effects on U.S. consumer spending — lower employment in housing-related sectors, a negative wealth effect attributable to falling home prices, and weaker consumer confidence — will drag down overall U.S. economic growth.

Still, the Conference Board forecasts that the U.S. economy will avoid a recession, mainly due to strong exports and business investment. However, further negative developments — as a major U.S. bank running into financial trouble — could easily undermine American consumer confidence and economic growth. In that scenario, Canadas economy would grow at a slower pace than the 2.8% currently forecast for 2008.