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Clouds form a backdrop for the buildings on Parliament Hill in Ottawa on Tuesday, Oct. 22, 2013. MPs return to Parliament on Monday with the spectre of the Senate expenses scandal still hovering over the Harper government. THE CANADIAN PRESS/Sean Kilpatrick

Sean Kilpatrick/THE CANADIAN PRESS

The Canadian economy is about to flatline, according to Macquarie Research.

In some of the most bearish commentary on Canada coming from a major financial institution, analyst David Doyle turns to history for a look at what to expect after a collapse in oil prices.

In 1986, following the last supply-side driven crash in oil prices, Canadian economic growth decelerated from 5 per cent to zero. What's more, the Canadian economy was buoyed by three tailwinds that won't be around this time: more momentum in the labour market heading into the shock, a pick-up in housing starts and residential mortgage credit growth, and an expansion in consumer credit growth.

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Mr. Doyle writes that in the first half of this year, "there is a possibility of a technical recession" – back-to-back quarters in which gross domestic product declines. But he still projects annualized growth of 0.2 per cent for the first half of the year, and 1.5 per cent in the second half, well below the consensus estimates of 1.7 and 2.2 per cent, respectively.

Non-resource exports should perform better than they did in 1986, supporting the modest economic growth that Macquarie forecasts. The extent to which this segment is able to offset economic softness, Mr. Doyle writes, depends primarily on the strength of the U.S. economy.

Since the beginning of 1983, there have only been seven quarters in which the Canadian economy contracted on a quarterly basis while the U.S. economy grew. Two of these instances occurred in 1986.

Macquarie projects that the Canadian economy will lose 60,000 jobs this year, the Bank of Canada will cut the overnight rate 50 basis points to 0.25 per cent by the middle of the year, and that the Canadian dollar will fall to 69 cents (U.S.) relative to the U.S. greenback by the third quarter.

For investors, Mr. Doyle offers this advice: have a bigger share of your portfolio in U.S. stocks than Canadian equities, and favour Canadian equities with a large amount of foreign exposure.

His overweight suggestions include Brookfield Asset Management, Gildan Activewear, Cott Corporation, ATS Automation, and Catamaran Corp. All receive at least 80 per cent of their revenues from abroad.

Mr. Doyle advises investors to underweight companies whose revenue streams come predominantly from domestic sources, like Home Capital Group, RONA Inc., Metro Inc., Wajax Corporation, and Rogers Communications Inc.

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