The Canadian economy is struggling to overcome the slowdown afflicting the US and other developed nations. More than 70 percent of its exports come south, and it’s not as productive as other members of the Group of Eight (G-8). But in broader fundamental terms, Canada is in good health—its relative strength rooted in its ample resources—and it may be able to avoid the worst a prolonged US downturn would offer.

Rising demand from Asia for energy and other commodities pushed Canada’s trade surplus to CAD5.4 billion in May, up from CAD4.8 billion in April. That demand, from developed Asia but more so from emerging economies in the region, is the source of relative relief.

Canada’s exports to countries other than the US reached their highest level ever, surpassing the CAD10 billion mark for the first time. Exports of energy products such as oil and gas were up for the seventh consecutive month, rising 8.1 percent to CAD11.6 billion in May. The increase was broad based but largely reflects rising prices and increased shipments of coal to Asia (to Japan and South Korea for steelmaking) and crude petroleum.

Industrial goods and materials shipments, most significantly metal ores, increased 9 percent to CAD9.6 billion. Iron ores nearly doubled in value on rising volumes and prices; a gain in volume of copper ores shipped to Asia was also a big factor. Overseas shipments of sulphur and potash to China also rose significantly. Robust demand for wheat, from overseas and the US, pushed agricultural products exports up 2.6 percent to CAD3.5 billion.

Canada’s ample resources, along with political stability, relatively benign inflation (see below) and a healthy balance sheet, make it unique among the G-8. It will never decouple from the US, but Canada is better able to withstand its ongoing deterioration.

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The Bank of Canada (BoC) identified three factors impacting the Canadian economy—ongoing US weakness, rocky global financial markets and rising commodity prices—in its statement this morning announcing its decision to hold its key overnight interest rate at 3 percent. The first two remain in line with expectations articulated in its April Monetary Policy Report, but prices for raw goods continue to “outstrip earlier expectations.”

Those factors “pose significant upside and downside risks to the bank’s base-case projection,” the BoC said. “Weighing the implications of these, the bank views the risks to its base-case projection for inflation as balanced. Against this backdrop, the bank judges that the current level of the target for the overnight rate remains appropriate.”

The statement said the central bank will continue to monitor the Canadian and global economies “and set monetary policy consistent with achieving the inflation target over the medium term.”

Rising commodity prices, however, have led to further increases in Canada’s terms of trade and have boosted real national income. GDP growth has slowed, but domestic demand is still rising. Although unemployment for June crept up to 6.2 percent, it’s still at a historically low level, and employment in Canada has grown by 1.7 percent during the trailing 12 months.

Those rising energy prices could boost headline inflation above 4 percent in the next few months. But core inflation, which factors out fuel, is projected to “remain well contained and broadly in line with earlier expectations, averaging close to 1.5 percent through the third quarter of this year and then rising to 2 percent in the second half of 2009.” The BoC’s tone on inflation is as hawkish as it was in its June rate announcement, reflecting public expressions of concern from Gov. Mark Carney as well as the results of the BoC’s June Business Outlook Survey.

The BoC aims to keep inflation within a range of 1 percent to 3 percent, targeting the 2 percent midpoint for the 12-month rate. Its short-term projection could be double the midpoint. Although the BoC’s inflation forecast has ramped up, a still-stumbling US economy and a still-crunching credit market mean rates are likely to remain frozen until 2009, when Canada’s economy is forecast to resume growing above potential.

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The BoC is engaged in a balancing act, teetering over the twin horrors “slowing growth” and “inflation.” Growth in the first quarter of 2008 was weaker than expected, and GDP is expected to expand by just 1 percent this year, down from a June estimate of 1.4 percent. The BoC now forecasts 2.3 percent growth in 2009, down from the previous forecast of 2.4 percent, before rebounding to an above-capacity rate of growth of 3.3 percent.

Speaking Engagements

“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.

The natural setting is, however, among the most exciting in the US. Venture west for the San Francisco Money Show Aug. 7-10, 2008, and conduct your own field study.

Neil George, Elliott Gue and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.

Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.

I also have a special invitation for readers to join me and my colleagues Elliott Gue, Gregg Early and Neil George aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please call 877-238-1270.