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Canada: Recoupling?; Europe: Banking Troubles Ahead?; Asia: Sound but Vulnerable; Middle East: Shelter from Subprime?; Latin America: Resilient?

By Christian Menegatti

This piece was co-written with help from other RGE lead analysts.

We take a look at how the rest of the world is faring amid the U.S. woes.

Canada:  Recoupling?

With 75% of its exports bound for the U.S. (whose economic outlook was revised downward by the OECD), Canada seems hard pressed to avoid the effects of the likely U.S. recession.  So far, though, terms of trade gains from a strong loonie have boosted domestic demand and offset rising credit costs, and the export and manufacturing slump.  But its vulnerabilities have led the Bank of Canada to cut aggressively (100bps since December), even if less so than the Fed.  With Canada one of few countries where inflation – even of food – is slowing, it may continue to ease policy rates in the hopes of cushioning the economy.

Europe:  Banking Troubles Ahead?

According to the Financial Stability Forum the full impact of the credit squeeze in Europe is yet to be felt.  Are European banks in as bad shape as U.S. ones?  Do they need to write down a large stock of impaired assets?

Asia:  Sound but Vulnerable

Financial contagion has taken a toll on most Asian equity markets, led by Hong Kong and India.  Rising risk aversion may deter capital inflows and asset markets in these economies though subprime exposure of Asian banks so far has remained low.  Even arguments for an economic decoupling of Asia from the U.S. are weakening, not withstanding strong macro fundamentals, improving domestic demand and adequate room for fiscal/monetary easing.

Middle East:  Shelter from Subprime?

The Middle East has (so far) been relatively sheltered from financial spillovers, with limited direct exposure to subprime loans – with some of Israel’s banks being an exception.  Domestic investors still dominate most of the region’s exchanges which are still recovering from the 2006 slumps; and with oil prices rising, there is no shortage of liquidity, some of which has found its way to those countries not blessed with oil and gas reserves.  Rising inflation and an oil price crash are the region’s biggest risks.

Latin America:  Resilient?

 According to S&P Latin America is in good enough shape to withstand an external downturn and sustain its stronger sovereign creditworthiness.  The Institute of International Finance and the IMF expect growth in the region to moderate to 4.5% (relative to the 5% of 2007).

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