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Canada’s Economy Contracts…but that’s No Reason to Worry

As the saying goes: when the U.S. gets the sniffles, Canada gets a cold.

Canada’s economy contracted -.1% in the second quarter, the first decline since 2009. But instead of a cold, it looks like nothing more than a sneeze.

And a sneeze only goes to show that Canada is not immune to risks to the global economy. The country’s growth was dragged down by temporary supply chain disruptions and a -2.1% decline in exports. That means the decline in GDP is not a representation of the intrinsic health of the Canadian economy.

Looking at the details in the numbers, they match the profile of an economy that is expanding rather than contracting, as the Globe and Mail pointed out. Business investment increased 3.7%…the sixth straight advance. And domestic demand is solid; spending on goods and services increased. And looking over the past 50 years, when domestic spending is growing, Canada’s economy has never seen two consecutive quarters of contraction. So, like in 2008, the country will be somewhat insulated from a global slowdown.

No one in Canada is worried about the pause in growth. Least of all the Canadian market, which rose 1% following the announcement.

The bottom line is that the biggest threat to Canada’s economy comes from outside Canada. As the country’s Finance Minister said, “Canada is not an island”.

It’s not an island. But it is a sound economy.

And that soundness can be seen looking at the country’s banks. I’ve mentioned my dislike for U.S. banks many times, and that has been echoed in the market, especially lately. While the U.S. financial sector is down -19% year-to-date, Canadian banks have fared better. In particular, I like Toronto-Dominion Bank (TD); in spite of recent volatility the stock is up 5.45% year-to-date. That said, I wouldn’t add a position right now; I would hold until market trends reverse.

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