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Uh-O Canada

Canadian Prime Minister Stephen Harper faces a January confidence vote.

For much of 2008 the contrast between Canada and its neighbor to the south could not have been more stark. North of the border: government surpluses and respectable economic performance as consumers continued to snap up such out-of-fashion items as homes and cars; an uninspiring fall election producing the exact opposite of change by returning Stephen Harper’s Conservatives to another minority government; and financial institutions in full business-as-usual mode. There was even a bit of backslapping in October, when a World Economic Forum survey named the country’s banks the soundest in the world. Aside from the carnage in the equities markets, it seemed a rather quiet time.

Too quiet, it turns out.

Late in the year Canada returned to earth, crash-landing in impressive style, complete with a constitutional crisis. Although the country’s economy grew at a 1.3 percent annual rate in the third quarter, the consensus is that growth slipped into negative territory late in the year and will remain there for at least the next few months. The Bank of Canada forecasts 0.6 percent growth in 2009, followed by 3.4 percent in 2010, but it’s not yet clear whether resource wealth and a more cautious regulatory environment will moderate the effects of recession or merely delay them.

What is clear is that 2009 will be an eventful year politically. In November, shortly after being reelected, Prime Minister Harper angered the opposition — which had been demanding a stimulus package — by instead issuing a brief economic update that spurned Keynesian-style stimuli and cut funding for the opposition parties. The centrist Liberals, center-left New Democrats and center-left Bloc Québécois, a regional party intent on Quebec sovereignty, immediately formed a coalition and announced that they were prepared to form a government upon defeating the Conservatives in a confidence vote — which Harper narrowly avoided by proroguing, or suspending, Parliament until January 26. The Liberals, facing a spring 2009 leadership race, hastily named a forceful interim leader: Michael Ignatieff, 61, who had returned to Canada just three years earlier after decades in the U.K., where he was a high-profile BBC commentator, and the U.S., where he headed Harvard University’s Carr Center for Human Rights Policy.

When Parliament reconvenes, the coalition could take power if it wins the vote, or it could force another election. More likely, a chastened Harper will carry on with grudging support from Ignatieff, who is cool to the idea of throwing in with the other parties. The prime minister is poised to include in the budget an economic stimulus package of about C$30 billion ($25.3 billion) — a move that "would not jeopardize" Canada’s triple-A rating, says Steven Hess, a sovereign bond analyst with Moody’s Investor Services in New York. Peter Routledge, a Moody’s bank analyst, says Canada’s banks haven’t suffered much from the political fracas. "They’re going into a recession well capitalized, with a strong domestic earnings platform and low exposure to structured credit problems."