Canada is well-positioned to weather a U.S. slowdown, whether it’s a soft landing or a harder fall, says BMO Nesbitt Burns in a new research note.

“Amidst the recent IMF warnings that a global slowdown could be triggered by the sharp U.S. housing slump or by surging inflationary expectations, commodity prices fell and stock markets sold off in Canada and the U.S.,” it says, noting that measures of housing activity, buyer interest, and prices have fallen.

“While excess demand in commodity markets initially triggered major inflation concern among central banks worldwide, the focus now seems to be shifting,” it says. “The great debate is whether the U.S. will enjoy a soft landing or, instead, suffer a recession.”

BMO Nesbitt says that the housing market is pointing “to a rough and rapid ride lower”; also, consumer confidence has weakened considerably and high gas prices have been hampering household income.

“Regardless of these concerns, the [European Central Bank, Bank of Japan and Bank of England] are likely to tighten further to maintain price stability in the medium run. And, as growth in China has been very rapid, the central authorities continue to introduce a wide variety of measures to slow the overheated economy,” it says. “Many, therefore, predict slower global demand growth for energy and base metals. Even the cessation of fighting on the Israeli border and the media coverage of the deep-Gulf oil finds by Chevron have tilted the psychology to lower oil prices, adding further fuel to the recent selloff in the TSX.”

Most probably, BMO Nesbitt says, “the Fed will pull off a soft landing in the U.S. economy. Inflation will dissipate over time, but the deceleration in real GDP growth triggered largely by the housing slump, will lead the Fed to lower interest rates by mid-2007.”

Even with the gloom surrounding the U.S. economy, BMO Nesbitt points out that the Canadian economy is in good shape to weather the weakening. “We have outpaced the U.S. over the past three years in the growth of real consumer spending, employment, real disposable income, stock prices, bond prices and even house prices. Consumer and business confidence is considerably stronger and capital spending is slated to remain robust, particularly in the oil patch,” it notes.

“Thus, even if the U.S. economy were to go into recession, which we strongly doubt, Canada’s would not,” it predicts. “With the domestic economy so strong, and relative interest rates so low, it is much less likely that Canada will slide into recession.” It also predicts that Canadian inflation prospects will remain muted, the Bank of Canada’s pause will continue, “and their next move will also be to lower rates next year”.