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Border Crossing
Subject Economic Growth
Topic International Finance, Recession
Key Words Recession, Interest Rates, GDP, Economic Growth
News Story

The fallout from the terrorist attacks on the United States has impacted the Canadian economy, possibly throwing it into recession. The governor of the Bank of Canada, David Dodge, expects that the third quarter of 2001 will be one of little growth, or possibly a slight decline. The damage and disruptions resulting from the terrorist attack on September 11 has weakened both the United States and Canadian economies. Canadian economists expect the American economy to recover rather quickly. There is a great deal of uncertainty about the future course of the Canadian economy especially given the international political situation.

The damage to lower Manhattan is estimated at $20 billion, and disruption resulting from the attacks will reduce U.S. output by another $25 billion in September. As the U.S. economy falters, the Canadian economy is impacted through international trade. Air and cross-border traffic has been significantly reduced. Shrinking stock market prices have the potential to weaken the economy still further and the consequences of a possible military action by the U.S. could be significant.

The Conference Board of Canada, in a report released September 21, estimated that Canada's GDP will shrink by a 0.5 percent annual rate in the fourth quarter of this year. Growth will also be down in the first quarter of 2002 by an estimated 0.25 percent.

The Bank of Canada cut interest rates by half a percentage point on the day of the attack and bank governor Dodge appears to be willing to cut interest rates further should the economy need more liquidity. Mr. Dodge does not believe that the Canadian government should stimulate the economy by means of deficit spending.

(Updated October 1, 2001)

Questions
1. Canada is one of the most important U.S. trading partners. Explain how a weakening of the U.S. economy could affect the Canadian economy.
2. The U.S. has decreased interest rates a number of times this past year. What impact does a decrease in U.S. interest rates have on Canada?
3. Canadians are hoping that the interest rate cuts that the Bank of Canada has undertaken will be sufficient to prevent a recession. What happens to aggregate demand when interest rates decrease? What happens to GDP and the price level?
4.. What is a recession, that is, how is it defined?
Source Canadian Press, "Bank of Canada acknowledges Canada may be slipping into recession," Excite.com News, September 22, 2001.

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