By James Langton

(January 9 – 12:00 ET) – If the United States is slipping inexorably into recession, Canada is going down with it, according to CIBC World Markets chief economist Jeff Rubin.

On the heels of the Federal Reserve Board’s emergency rate action, talk of massive tax cuts to stimulate the U.S. economy, and a recession-predicting bond market, Rubin asks, “If the economy is heading for a soft landing, why are there so many fire trucks on the runway?”

Although he’s not ready to call a recession, Rubin notes that by the time that we know for sure no one will care. “For America’s industrial heartland, the recession has already begun. The auto industry will see as much as a 25% reduction in production. U.S. manufacturing output will decline for at least two quarters, if not more. And even the largely services-based GDP number will contract in the first quarter.” On this basis, Rubin is calling for another 100 basis point easing from the Fed over the next six months.

Canada will not likely escape unscathed either, he says. Rubin notes that our fortunes have never been more closely correlated to those in the U.S. “While tax cuts will help shore up domestic demand, they will be no more effective in protecting the Canadian economy than spending increases were during the last recession. Offsetting the loss of auto exports will alone exhaust Ottawa’s entire $6 billion tax stimulus slated for this year. It will fall largely on the shoulders of the Bank of Canada to offset the rest of the drag coming from southern markets.”

So far the Bank of Canada has resisted a matching rate cut, but Rubin says it won’t hold out for long, with auto production twice as important to Canada as it is to the U.S.

He notes that we have never seen a manufacturing recession in the U.S. that hasn’t produced one here, too. “When it does [cut], not only will the Bank of Canada fully match any rate reductions by the Fed, but it will also tolerate a sinking Canadian dollar as a means of providing further stimulus.”