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Slowdown, Not Meltdown

Posted On: 2008-10-09

OTTAWA -- Close, but no recession, at least in Canada.

That was the good news amid all the bad in economic forecasts yesterday, including declarations by several that the U.S. economy is already in recession and one that, without further action by authorities the U.S., faces a 1930s-style depression.

The forecasts -- by a bank and a think-tank in Canada, and the International Monetary Fund in Washington and think-tanks in New York -- were released as North American markets were gyrating between triple-digit losses and gains in volatile trading in the wake of a coordinated round of deep half-point interest rate cuts by half a dozen central banks, including the U.S. Federal Reserve and the Bank of Canada.

"There are pre-depression conditions," New York-based High Frequency Economics in a report in which it joined other analysts in predicting a further half-point cut in U.S. rates later this month, and in which it called for near-zero interest rates as well as a more activity fiscal policy by the U.S., such as a major increase in spending on infrastructure there as offering the most effective antidote.

Here, Bay Street's benchmark TSX eventually ended up with a gain of more than 225 points to back over 10,000, while the blue-chip Dow Jones industrial average in the final minutes plunged back into the red to end the day down nearly 190 points, and remaining well below the 10,000 mark.

The loonie, meanwhile, continued to lose ground to the U.S. dollar, slipping below 90 cents US for the first time in 18 months to close at 89.06 cents US as oil sank below $89 US.

The rate cuts by central banks in Asia, Europe and North America, as well as a $96-billion Cdn financial-sector rescue by the British government, came as forecasters were slashing their forecasts for economic growth around the world and here, although all predicted Canada will avoid recession.

RBC, Canada's largest financial institution, said the "persistent turmoil in financial markets and disappointing economic trends over the past two quarters" prompted it to cut its forecast for growth here to 0.9 per cent from 1.4 per cent, and project only a modest rebound to 1.5 per cent in 2009.

"The U.S. economy now appears to be in recession with Europe, the U.K. and Japan also sinking fast," RBC said.

"While Canada is in better position with its financial sector less heavily impaired, overall growth will be substantially weaker than previously anticipated."

"The continued weakness in the U.S. economy is expected to dampen growth in Canada," said RBC's chief economist Craig Wright. "However, this pressure on our growth will be tempered by strong commodity prices which are contributing to robust export revenues and providing support to Canadian domestic spending via a boost to incomes."

Canada has also enjoyed strong growth in national income, which have boosted consumer spending, business investment and purchases of imports and is benefiting from what are still relatively high commodity prices, it said.

Job growth has also slowed and Canada's housing market is cooling, but it is not expected to suffer a U.S.-style meltdown as Canadian mortgage markets did not see the excesses that afflicted the U.S. housing sector, it said.

Global Insight, an economic think-tank, also cut its growth projections for Canada while declaring the U.S. is in recession.

"The U.S. economy is forecast to now be in recession," it said, adding that it's no longer just a "mild" recession and projecting the contraction in that giant economy will run from the third quarter of this year through the first quarter of next year.

Meanwhile, it cut its forecast for growth in Canada's economy this year to 0.6 per cent from 0.8 per cent and next year to 0.9 per cent from 1.7 per cent.

However, there will not be two consecutive quarters in which the economy contracts.

"While a recession is most often defined as two consecutive quarters of negative growth, we should not take too much comfort in the 'no recession' forecast," it added. "This is a very weak forecast of economic growth."

The International Monetary Fund, meanwhile, projected that Canada next year will have the fastest growing economy of the G7 major industrial countries, at 1.2 per cent, despite virtually no growth of just 0.1 per cent in the U.S., Canada's main export market.

 

Eric Beauchesne, Canwest News Service
Published: Thursday, October 09, 2008
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