The energy- and resource-rich Canadian economy will not follow the U.S. into a recession, predicts CIBC World Markets in its latest economic forecast.

“For Canada, the diminished importance of the American economy to global commodity demand has meant downside protection for its resource rents against a U.S. economic downturn,” says Jeff Rubin, chief economist and chief strategist at CIBC World Markets. “The resource sector still enjoys booming economic conditions, and will continue to do so over the next four quarters, irrespective of the pace or timing of a U.S. recovery.”

The report finds that record strength in global commodity and energy prices has translated into soaring growth in Canadian personal and corporate income. Those gains show up in a very healthy increase in domestic spending and enriched tax revenues for goverments.

Government revenues have grown from royalty rents and soaring corporate income taxes which have funded a national public sector hiring spree, huge infrastructure spending and fresh tax-cutting initiatives.

The report finds that if Canada were an island unto itself, the talk would be about a boom, not a recession risk, given the strength of final domestic demand, and particularly, consumer spending, which was up more than 7% annualized in the fourth quarter of 2007.

The bank forecasts that solid household income fundamentals combined with further interest rate cuts, should be enough to sustain a 3% pace to real consumption in 2008, even with a temporary rise in the jobless rate over the summer.

“It is in domestic demand growth, much more than in GDP growth, that the relative strength of the Canadian economy is most apparent against the U.S.,” Rubin says. He notes that domestic demand growth in Canada likely ran about 5.5% year-on-year in the first quarter of 2008 compared to about 1.5% in the U.S.

Rubin believes manufacturing sector remains vulnerable to both a U.S. recession and a strong Canadian dollar. These combined forces will hit Ontario the hardest, with its economy likely to come closest of all the provinces to be dragged down into a recession of its own.

In response, he expects the Bank of Canada to chop another 75 basis points from the overnight rate taking it as low as 2.75% — although this would still be 150 basis points above the U.S. Federal Reserve Board’s target.

This rate gap, combined with continued strength in energy and resource prices, should push the Canadian dollar to as high as US$1.05 against the U.S. greenback by year end, further increasing the spending power of Canadian consumers.

Rubin expects Canadians will begin to feel the pain from global food and energy prices in 2009 with the Canadian CPI to average 3%, the upper end of the Bank of Canada’s inflation rate target.

The full CIBC World Markets report is available at http://research.cibcwm.com/economic_public/download/fapr08.pdf.