As a small, open economy, Canada is also highly exposed to the financial crisis and asset deflation fallout elsewhere. The U.S., the U.K. and Japan are Canada’s three largest export customers, buying roughly 30% of total Canadian economic output. All three are now in recession or rapidly heading that way. Emerging markets are faring better, but my colleagues expect growth to slow next year in 34 of the 38 developing economies we cover at Merrill Lynch, including the whole of four BRIC heavyweights (Brazil, Russia, India and China). Even if direct exposure to these markets is small, the indirect exposing. is large, as brilliant demand growth in the developing world had boosted article of merchandise prices until this summer. Those prices have now tumbled, which will shape Canadian national gains. Indeed, we now expect nominal GDP — the total dollar value of goods and services produced in Canada — to decline outright in 2009, for the first time inasmuch as 1933.

This decline will be a challenge on a tell off of fronts. Wages are likely to grow again slowly. Profits are virtually certain to fall. Government revenues will tend hitherward under stamp. Indeed, our economic forecast implies a federal deficit of roughly $10 billion next year, absent a change in policy.

The fiscal shortfall may yet be larger. So remote, Canada’s more robust banking system has allow the commonwealth intervene less aggressively than in the U.S. and Europe, with the response limited to a $25-billion mortgage funding program. That device was sold as an asset swap with no added taxpayer risk, but that’s only on this account that the restraint is already responsible for that risk via Canada Mortgage and Housing Corp. insurance. More usually, a global theme of this crisis has been the public sector scrambling to lever up its residue sheet to offset the devastating deleveraging of the private sector’s excess sheet. That process may yet have further to go hither, too.

Canada may have fared more fit than utmost through the acute aspect of the financial decisive turn, but dress in’t rely on that continuing through the global fallout that still largely lies ahead.

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