The United States and Europe are facing an imminent recession, but thanks to low interest rates and a strong housing market, Canada is likely to post the best economic showing of G7 countries, according to a leading economist.

Speaking at Toronto’s National Club on Wednesday, Sherry Cooper, chief economist at BMO Capital Markets and BMO Nesbitt Burns, admitted Ontario’s economy has moved into a “negative category” due mainly to the ailing auto sector and a slump in manufacturing. She also pointed out that Quebec is facing a similar situation. However, Western Canada’s energy market is so strong that she expects Canada’s economy to be tops amongst the G7 next year.

Canadian financial stocks are likely to see “further substantial declines” due to the lingering U.S. subprime mortgage crisis, according to Cooper, but the current budget surplus, low interest rates, good employment growth, and high commodity prices should protect Canada’s economy from the global slowdown. “I believe we will come through this without a recession,” she said.

Cooper warned that all signs indicate the global slowdown that originated with the subprime mortgage crisis in the U.S. is ongoing and has yet to reach its nadir.

“Regulators in the U.S., the Fed, and the Treasury are on red alert, and for very good reason,” said Cooper. She explained that 70% of all mortgage originations in the last year have occurred as a result of the funding or guaranteeing of struggling secondary mortgage lenders Fannie Mae or Freddie Mac, which hold half of the mortgages outstanding in the United States, worth approximately $5 trillion. This has resulted in a leverage ratio of 68:1 for the state-sponsored enterprises, double that of previous victims of the subprime crisis. “Never has Merrill, or Bear Stearns for that matter, seen leverage ratios so high.”

Pointing out that more than 20% of Fannie Mae and Freddie Mac debt is foreign owned, Cooper says the Fed and the Treasury have little choice but to bail them out. “Fed to the rescue, Treasury to the rescue,” she said. “I have no doubt they will do whatever it takes.”

On the other hand, Canada has seen a decline in housing prices, but in a more restrained manner than the precipitous drop in the U.S. Cooper said that the difference between the Canadian and American situations is the ratio of household incomes to home prices, as prices have come down a healthy 1%-2% in Canada compared to the 15% plunge seen in the U.S.

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