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Recession likely avoided, but little to cheer about

The U.S. side of the border crossing at Windsor, Ontario. A report Friday from the U.S. Commerce Department showed consumer spending in Canada’s main export market slowed in August and, more ominously, incomes unexpectedly fell for the first time since the fall of 2009.


Considering the alternative, any whiff of economic growth in July -- the first month after the first quarterly contraction since the recession -- was going to bring sighs of relief.

Even though the 0.3-per-cent increase in gross domestic product reported by Statistics Canada Friday morning was exactly what most economists were anticipating, albeit with baited breath, the fact remains it was the biggest gain in seven months. So, the analysts who were quick to argue that the July increase demonstrates that -- absent a massive, one-time shock like the Japanese earthquake and its effect on auto production -- Canada's economy can still grow even in an extremely uncertain global climate, were right.

Unfortunately, those who emphasized that the external backdrop has deteriorated since July, and that growth will be harder to come by in the last few months of the year, were also right.

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"Canada is not an island,"' Leslie Preston, an economist at Toronto-Dominion Bank, said in a note to clients, predicting that the rebound in the third quarter -- which most economists say will produce annualized growth of between 1 and 2 per cent -- will be followed by "modest growth (between October and December) as recent financial turbulence weighs on business and consumer sentiment to pull some of the steam out of domestic spending.''

And there is the rub. The Canadian dollar has dipped in recent days and, according to an analysis by BMO Capital Markets, will fall to 93 cents (U.S.) by the end of 2011 and spend much of the first half of 2012 around that level. In normal times, this would be welcome news for exporters, as one of the biggest impediments to their success in foreign markets takes a couple steps into the background. Problem is, the loonie is poised to continue its breather for a few months because economists and currency strategists see a sustained flight to the safety of the U.S. dollar -- which is occurring because the external picture has worsened, and could worsen further.

On Friday alone, there were many reminders of the risks to Canada's trade-dependent economy. A report from the U.S. Commerce Department showed consumer spending in Canada's main export market slowed in August and, more ominously, incomes unexpectedly fell for the first time since the fall of 2009, yet another grim vignette from the country's stagnant jobs market. While a separate report showed factories continued to hum along in September, that likely can't continue as more Americans hunker down and save and if global demand sputters.

There is some reason to hope that the worst-case scenarios for the European debt drama may be avoided, now that German parliamentarians have agreed to bolster policy makers' ability to stop the bleeding. Nonetheless, global stocks fell again Friday, pushing the MSCI All-Country World Index to its biggest quarterly loss in three years, in no small part because powerhouse economies like China and Germany showed more signs of slowing down.

In Canada, the August data that's available so far is a mixed bag, according to BMO's Doug Porter; Canadians worked 0.3 per cent more hours and auto production inched up, but housing starts plunged and car sales slowed. It's hard to fathom how September could have been much better, given signs that the fear gripping financial markets started to cut deeply into business and consumer confidence.

Yes, the July GDP report confirms that Canada has very likely avoided the technical recession -- two consecutive quarters of negative growth -- that many feared would happen. But it's the months that followed July, and the ones coming up, that will determine whether we really can skate through all this turmoil.

And there is precious little anyone in Canada can do to shape the outcome.

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