Canada’s economy grew by only 0.3% quarter to quarter annualized in the April to June period, after a -0.8% record in the first quarter. The outlook has turned mushy with housing starts on a downhill path and auto production affected by weak U.S. demand.

What provides comfort, however, is the fact that Canada’s base level of activity is quite solid. For example, the unemployment rate at only 6.1% is near an all-time low. Furthermore, unlike our American cousins, the overall economy is continuing to provide new jobs at a reasonable clip, +227,000 year over year and +86,000 since last December.

The advance in house prices has almost come to a stop, but there is nothing like the panic selling (-16%) that has set in south of the border. Few Canadian homeowners are overextended in their mortgage commitments. The banking system in Canada remains secure, with no talk of defaults. Credit is readily available to businesses and consumers.

Office markets are tight in almost all major centres, both downtown and in the suburbs. The overbuilding of some previous boom-bust cycles has been judiciously avoided. Finally, inflation in Canada remains low enough, with a further downward bias, to permit a level of interest rates that continues to be stimulative.

Until the U.S. economy fully recovers from its deep wounds, Canada will have to hobble along as well. But this will be on one crutch as opposed to being prostrate. The Canadian economy should return to about a 2.0% real (inflation-adjusted) Gross Domestic Product (GDP) growth rate in 2009, after wading through a 1.0% advance in 2008.

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