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Is Canada’s luck finally running out? Through three bad economic years, Canada has emerged as an island of relative stability amid the global storm. More Canadians are working today than were working in the summer of 2008. No other major Western economy has done so well.
Canada has the lowest debt burden of any G7 country. The turmoil in the Eurozone and the gloom in the United States feel very far away from the stability and prosperity of Canada.
Yet Canadians should be warned:
I was talking the other day to a diplomat from a small northern European country. I congratulated him on his nation’s relative economic success. He shrugged. “It’s only a matter of time. You cannot long remain a winner country in a loser region.”
The same principle applies with nearly equal forces on a loser planet.
This week, global markets were jolted by bad news from China: a third consecutive month of decline in its manufacturing industries. International economists have begun to question whether China is not following the U.S. back into recession.
A Chinese recession would cut world demand for oil, nickel, wheat, potash and other Canadian commodities.
Prices for those commodities have already taken a tumble: Oil has bumped back down to $80 a barrel. As commodity prices go, so go Canadian exports – and so goes the Canadian dollar.
Yet the decline in commodity prices is actually the lesser threat to Canada. The greater threat comes from the risk of a Chinese financial crisis.
Here’s how the threat uncoils:
– As America slips back into recession, American families buy less – especially including manufactured goods from China.
– As Chinese manufacturers earn less in the U.S., they deposit fewer dollars in Chinese banks.
– With less dollar liquidity, Chinese banks can finance less asset speculation.
– With less Chinese asset speculation, all those condominium towers rising in Toronto and Vancouver will find fewer overseas buyers.
– With fewer overseas buyers, prices fall for Canadian housing.
Then arrives the final step, the most lethal. Canadian households are as heavily indebted, relative to income, as their American counterparts were in 2007. Thus:
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