Cross-border shoppers will rob the Canadian economy of billions of dollars in economic growth, an economic think-tank is warning.
The surge in cross-border shopping due to the strong dollar, not to mention the slump in exports, could knock nearly three-quarters of a percentage point off growth in the Canadian economy, says Action Economics, an online economic research firm.
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However, the U.S. economy could get a much needed boost from the rise in cross-border shopping, as well as an increase in exports and drop in imports resulting from the relative weakness of its currency against the loonie, the report adds.
"Overall, the rapid rise in the Canadian dollar should resonate through both the Canadian and U.S. economies well into next year," it said, as the loonie traded near a 33-year high of more than $1.03 US.
"Canadian dollar strength adds to the downside risk for Canada's domestic economy via deflection of consumer spending, and will likely exacerbate an already difficult environment for some Canadian exporters," it said. "In contrast, the U.S. economy stands to benefit via increased retail sales and export demand, which would provide a timely offset to what is shaping up to be a sizable drag from residential investment."
Ryan Brecht, an analyst with Action Economics and author of the report, said in an interview that it's difficult to put a dollar estimate on the cost to the Canadian economy of the increase in cross border shopping but that it could be significant and in the billions of dollars.
The report was issued amid evidence that the U.S. housing market meltdown was deepening, adding to fears of a consumer-led U.S. recession.
U.S. home sales plunged eight per cent last month, almost double the decline in August and in analysts' expectations, said BMO Capital Markets economist Sal Guatieri. The drop in sales boosted the inventory of single homes on the market to a 20-year high and left the median price of a single-family home nearly five per cent lower than a year earlier, the steepest decline on record.
"Unless demand perks up, prices will continue to slide, raising the risk of a weaker economic outcome," he said, adding the report added to the odds of a further hefty cut in U.S. interest rates.
However, BMO Financial Group said that its chief investment officers on both sides of the border agree there is "no recession on the horizon."
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