Blogs & Comment

How will the U.S. government shutdown affect Canada's economy?

Just pray it doesn't last long

FILE - In this Tuesday, Oct. 1, 2013, file photo, people walk near Capitol Hill in Washington. As the government’s partial shutdown enters a second day, most companies across the country are doing business as usual. Yet concern is rising that a prolonged shutdown would cause some work at private companies to dry up and consumers to lose faith in the U.S. economy. (AP Photo/Susan Walsh, File)

(AP Photo/Susan Walsh, File)

When the U.S. sneezes, Canada catches a cold. In the case of a U.S. government shutdown, though, the adage should probably read the other way around: When the U.S. catches a cold, Canada sneezes.

That’s because, while the Canadian economy is very sensitive to whatever happens to U.S. consumers and private companies, we’re not quite so closely linked to America’s public sector. There aren’t that many Canadian firms that depend directly on the U.S. government for their business.

The last time the U.S. went through a partial government paralysis in 1995-1996 — for roughly three weeks in two separate instances — economic growth slowed by a quarter of a percentage point during the last three months of 1995. In Canada, a two-week shutdown this time around could shave a decimal place off our growth rate in the fourth quarter, estimates Avery Shenfeld, chief economist of CIBC World Markets. “So, if you were projecting growth of 2.2 per cent, it might be 2.1,” he told CBC. With Canada expected to grow in the range of 2-2.5% between October and December, that really doesn’t sound too bad.

The danger, though, is that Uncle Sam’s cold turns into a full-blown flu. A few days or a couple of weeks of shutdown is an inconvenience. Federal government employees and contractors will have to make do with a little less cash, as Washington freezes pay and payments. Canadian truck drivers crossing over into the U.S. might have to put up with longer lines, as U.S. border agents might work overtime, even though they are exempt from furloughs.

A prolonged shutdown, though, would take a sizable toll on American families and businesses. Unpaid contractors might be unable to pay their employees and creditors on time. Families of government employees might have to trim consumption. The backlog at the border could turn into gridlock, costing Canadian exporters money and business opportunities.

Add it all up, and a long federal government freeze could trim U.S. growth by 1.4%, reports the Washington Post’s Zachary Goldfarb. That means the economy would barely expand during the all-important Christmas season. “A longer shutdown, could significantly impede the economic recovery,” Craig Alexander, chief economist at TD Bank Group, wrote yesterday in a note to clients.

Keep your fingers crossed it doesn’t come to that.