The U.S. economic slowdown could have less impact on Canada than typically expected, Morgan Stanley says in a research note.

The firm doesn’t deny that Canada will be hurt by a U.S. downturn but, it suggests, “Canada is better placed now to face a U.S. slowdown than at any other time during the past decade — and this could mean that the Canadian
economy may be more resilient.”

The 10-year rolling correlation between the GDP of Canada and the U.S. appears to have fallen since 2001, Morgan Stanley observes. During the 1992-1996 period, the average correlation was 0.87, but it dropped to 0.65
on average for 2002-2007. The firm traces this shift to two major economic policy changes: the emergence of fiscal surpluses in Canada; and the Bank of Canada’s move to inflation targeting.

It also reports that, despite headline growth being similar in the two periods, the composition of the growth differed. In the past five years, Morgan Stanley finds, consumer spending has become more important, and the
contribution from exports has fallen. These changes suggest that Canada may be able to weather a U.S. slump better than it has in the past.

“A slowdown in the U.S. will obviously have a negative impact on the Canadian economy — but the extent of this will depend on the degree and source of the slowdown,” it concludes. ”However, we think that the impact could be smaller
than previously expected or less than suggested by some models. The link between Canada and the U.S. has moderated, and a strong Canadian consumer could help cushion the impact.”