Canada and the world cannot escape the fallout from an ailing U.S. economy, say TD Bank economists in a new report entitled The Domino Effect.

In the report, TD Economics argues that the growing integration of economies around the U.S. hub means that the ongoing U.S. slowdown has been rapidly transmitted around the world. It also means that a recovery in the world economy will be heavily dependent upon a revival of U.S. demand. “That recovery is not going to happen in any meaningful way until at least the end of the year,” says Craig Alexander, senior economist at TD Bank.

TD says the weakness in the United States is primarily being passed on through international trade ties. “Slackening U.S. demand has been a major obstacle for exports from the United States’ NAFTA partners — Canada and Mexico. A sharp drop in U.S. business investment, particularly in high-tech goods, has also taken a bite out of exports from non-Japan Asia,” notes Alexander.

A sharp decline in exports results in unwanted inventory accumulation in the manufacturing sector, which leads to production cutbacks, and ultimately, layoffs. Lost jobs mean lower spending, while lower profits result in weaker business investment. “This cycle is now underway to varying degrees in all of the United States’ major trading partners, including Canada,” says Alexander. Multinational corporations are also spreading the pain.

TD Economics argues that resistance is futile, given the extensive integration of economies and financial markets around the world. “Monetary policy is a more effective instrument for providing short-term stimulus. And not surprisingly, virtually all major central banks have cut rates since the start of the year,” notes Alexander.

While the U.S. slowdown is unavoidable, TD Economics sees a revival in the fourth quarter. Canadian economic growth will likely drop to 2.3% this year from last year’s 4.7% pace. “However, there is a light at the end of the tunnel, as the U.S. Federal Reserve’s aggressive interest rate cuts since January have set the stage for a U.S. recovery. By the fourth quarter of 2001, the U.S. economy should start to revive, shifting the dynamic from the transmission of weakness to one of vitality,” says Alexander.