Woe, Canada: USA's economic chill spreads north

"We're getting hammered in the auto parts industry," says Buzz Hargrove, 63, president of the Canadian Auto Workers union.

Apart from the reeling factory sector, however, Canada's economy remains healthy. An energy boom centered on the Alberta oil sands projects, designed to harvest petroleum from sludgelike underground deposits, is fueling robust growth in the West.

Last year, Canada's economy grew faster than the USA's for the first time in five years. The unemployment rate in January hit a 33-year low of 5.8%, and University of Toronto forecasters expect the economy to continue growing this year.

At the Eaton Center shopping mall in downtown Toronto, there are thick crowds even on a weekday afternoon. Jean Norman, 55, a recent retiree from an executive post at the local public transit company, says she's not worried about a potential U.S. recession spilling across the border.

"I just think we're a couple of steps ahead and have distanced ourselves enough so we can probably get beyond it," she says.

Uncertainty ahead

But the first glimmers of consumer unease are appearing. In the past three months, the percentage of Canadians expecting the economy to improve this year plummeted to 25% from 49%, according to Nanos Research. Those worried about a downturn rose to 33% from just 20% in November.

Pharmacist Nadeen Habib, 32, says she fears that a U.S. decline could depress the entire global economy, not just Canada. "I feel it's not stable at all," she says. "At any moment, something could cause a crash."

For embattled Canadian manufacturers, the deepening U.S. economic downturn couldn't have come at a worse time. Auto parts suppliers have been deeply wounded by the lofty Canadian dollar, which makes their products more expensive for Americans.

The Canadian currency, known as "the loonie," cost 62 cents in 2002. By October 2007, for the first time, it cost more than $1.00, close to where it trades today.

Parts makers also see potential trouble in Detroit's path-breaking 2007 labor agreement with the United Auto Workers, which opened the door to a two-tier wage system.

Beginning in 2010, automakers can hire new workers for roughly half the $26 hourly wage of today's assembly-line operators, making U.S. parts makers much tougher competition for their Canadian counterparts. "I think it's a game-changing event," says Gerry Fedchun, president of the Automotive Parts Manufacturers Association.

In a bid to repair their competitiveness, Canadian manufacturers are streamlining operations, rethinking production systems and shedding workers.