Is Canada's Economy More Recession Proof Than America's?

With the global economic outlook beginning to look increasingly bleak, it seems that both the European and North American economies may be about to enter into full blown recession. This is obviously very troubling for investors who are now looking around for a relative safe haven. In this post we will ask whether that safe haven could be in Canada and examine to what extent the Canadian economy is ‘recession proof’. We will compare the Canadian vs US economy, the Canadian stock market vs US stock market and take a look at why Canadian dividend stocks may be a sound investment right now.

Canadian vs US Economy

With a GBP of $1.643 million, Canada boasts the 8th largest economy in the world (by nominal). While that does put it a whole 8 places behind the US (who are set to remain in the number 1 slot for the foreseeable future), during 2022’s tough trading conditions, Canada’s economy has continued to grow by 3.3% making it one the world's standout performers.

The Canadian economy is predominantly dominated by a small number of powerful sectors with the majority of the nation's wealth generated by banking and energy - as one of the worlds largest extractor of fossil fuels the latter should presumably come as no surprise.

There is of course no denying that impressive as it is, the Canadian economy pales in comparison with that of their neighbour to the south. Furthermore, anybody who knows it will also testify that it is far less dynamic and critics are quick to point that it's over-reliance on big banks and fossil fuels could leave it vulnerable to disruptive market forces in the future (such as a ban on fossil fuels).

And yet at the same time, there are plenty of voices within the investment world who actually feel that the Canadian economy and in particular the Canadian stock exchange may be a safer bet than the US right now.

The Canadian Stock Market vs US Stock Market

The Canadian stock exchange consists of both the Toronto Exchange (TSX) and the Canadian Securities Exchange. Together they form the 11th largest stock market in the world today. There are over 1,700 listed issuers totaling a combined market capitalization of about CAD $3,059,755,023,680. This is just 6% of the size of the US market (the world's largest stock exchange, with 2,585 listed on the NYSE and another 3,790 on NASDAQ). However, despite its relatively humble size, there are still some huge opportunities.

As you might expect, the Canadian stocks listed on the exchange reflect the nation's economy. A number of its biggest listings are drawn from the financial services sector as well as its giant energy sector.

Earlier on we mentioned that the Canadian stock exchange is less dynamic and innovative than the US, and normally, this would be considered something of a weakness. However, in times of global uncertainty (and indeed, global recession) the reality is that the new kids on the block are often the first to be served up on the sacrificial altar. As such Canada’s ‘oldskool’, conservative economy may well be perfectly poised to see off the coming hardships.

Canadian Banks

Sure, a recession will always hit financial services institutions acutely and as such, any national economy that relies heavily on the industry will find itself particularly sensitive to the pains of recession. That said, the big 5 Canadian banks command an astronomical market share between them and are all well strong enough to weather the storm - the prospect of one of them failing like Lehman Brothers did in 2008 seems nigh impossible (although then again, the idea of Lehman Brother failing was also deemed impossible prior to 2008).

Canadian Energy

As for the energy sector, Canada’s oil and gas extractors are amongst the few net beneficiaries of the rising cost of energy prices - case in point, the Canadian energy giant Suncor’s trading revenues so far 2022 are up 76% attracting renewed interest from investors.

Is This The Best Time to Buy Canadian Dividend Stocks

After a bit of a rough ride throughout the COVID-19 pandemic, the US dollar returned to form in 2022 and recently posted some 3 decade highs. The Canadian dollar on the other hand, has languished in the doldrums and even reached a 2 year low at the end of summer. While this is disappointing for many Canadians, the CAD to USD exchange rate is good for any investors based in the states, looking to acquire Canadian high dividend stocks. This is quite simply because a strong dollar means that they have increased purchasing power and can get more stock for their buck.

For this reason, the Canadian exchanges are becoming increasingly interesting for international investors who perhaps feel priced out of buying in the US at this moment.

In Summary - Are Canadian Stocks Recession Proof?

In reality, nowhere is truly recession proof. Canada’s economy does appear to be poised for stagnation, if not contraction, and some commentators are even alleging that the country has already hit recession.

Still, after comparing the Canadian vs US economy and comparing the Canadian stock market vs US stock market, there is every reason to believe its recession may be felt less deeply than that of other major western economies. For investors, Canadian dividend stocks are a shrewd investment and the Canadian bank and the Canadian energy companies are all very safe bets.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes