Recession

Canada's economic performance is expected to be sluggish through the first quarter of 2009, but the Bank of Canada says growth is expected to pick up over the remainder of 2009 and to shoot to "above-potential" in 2010 as credit conditions improve and interest-rate cuts take hold. Ron McDougall reports ...

Plunging stock markets and economic slowdown are hitting Canada hard, but the strength of the Canadian banking system and the recent robust performance of the Canadian economy have put the country in a better position than most to weather the global financial storm.
Although the Canadian banks have incurred some writeoffs related to the subprime mortgage problems in the U.S., they are well capitalized, and therefore are not on the brink of collapse like some U.S. and European banks.
Although Canadians have been reassured there will be no need for the federal government to buy equity in any of the banks, the federal government has taken a couple of measures to ensure that the Canadian banking system has access to funds.
In early October, Finance Minister Jim Flaherty announced that the Central Mortgage and Housing Corporation, a federal government agency, would buy up to $25-billion in mortgages from the banks over the next year. This makes funds available to the banks at lower rates than elsewhere, and ultimately means lower costs for mortgage holders.
After most other countries had made the move, Flaherty belatedly introduced a program to guarantee up to $218-billion of commercial debt for Canadian banks to ensure continued access for them to global funds. However, with the government taking 1.85% of the total loan value, the banks see the program as too expensive and unlikely to be used, except as a last resort. In any case, they say they aren't having difficulties in obtaining access to funds.
"There is this concern that our banks could be disadvantaged competitively," said Flaherty, stressing that the Canadian banking system is "sound."
The Bank of Canada has acted quickly and prudently to ease the economic and financial problems. Twice in October, the central bank lowered interest rates and hinted at future rate cuts.
Over the last few years, the Canadian economy has come through a good period of growth, driven primarily by high commodity prices. The oil sands have been booming and potash for fertilizer has been in high demand. A strong housing market has buoyed the construction sector and helped the forest products industry. Employment levels have been high. Surprisingly, 107,000 new jobs were added to the economy in September.
Then suddenly everything changed. On virtually all fronts, the Canadian economy is contracting. Housing activity is in decline and price drops are already being felt in the major cities.
Yet Canadians are not expecting to suffer the devastating level of foreclosures and housing price declines of the U.S.
Even so, tightening of credit is hampering Canadian business investment; consumer confidence is at its lowest level in 25 years and retail sales at Christmas are expected to be slower.
The dramatic collapse of world commodity prices is having significant effects too. Although lower oil prices are welcomed by commuters, this means a slowdown or even cancellation of a number of major oil projects. Copper prices, down 50% from their high in July, and nickel prices, 80% off since May 2007, are dampening mining activity. First Nickel Inc of Sudbury is closing its operations, and other aluminum and copper producers are reassessing projects.
Although the current outlook is grim, it will eventually be the commodities, and particularly the oil sands, that will pull Canada through the economic slowdown.
Meanwhile, there's a lot of pain in the Ontario manufacturing sector where the problems in the automotive sector remain severe, with GM and Chrysler on the brink of bankruptcy and discussing a possible merger. None of the possible outcomes can mean anything but lost jobs.
But manufacturing difficulties go far beyond the automotive sector. For example, one of Owen Sound's major employers, PPG (Pittsburgh Glass), is folding up its float glass plant, leaving 170 laid-off workers with no alternative jobs. Here, and in many other Ontario municipalities, the province's long-term manufacturing problems are now causing real pain.
The U.S. recession, already underway, will slow the Canadian economy further, but the recent freefall in the Canadian dollar should cushion that impact. Currently trading around US 79 cents, the loonie has plummeted from its high of $1.10 last November due partly to the international view of the Canadian dollar as a petro currency. With the decline in oil prices, investors have fled from the Canadian energy sector. But the plummeting loonie is also due to the stronger U.S. dollar. Typically in times of financial volatility and uncertainty, U.S. treasury bills and other U.S. assets become the destination for investors. And even with the severity of the current crisis, this is where investors are again turning.
The Bank of Canada has adjusted its economic forecast significantly downward, now seeing only 0.6% growth in each of 2008 and 2009, with a recovery to 3.4% in 2010. The fourth quarter of this year is expected to show slight negative growth, and the first quarter of 2009 almost flat.
But Bank Governor Mark Carney suggests the pain won't be too bad for Canadians because banks, governments and households are starting into the downturn armed with strong balance sheets.
Tell that to investors on the Toronto Stock Exchange which, like all world stock markets, has been battered. In October, the TSX index plunged 40% to its early 2004 level, shaking investors, and worrying older Canadians who see their retirement savings being wiped out.
The next couple of years will require constructive economic leadership by the federal government and the Bank of Canada. During the recent election campaign, Stephen Harper avoided the economy as an issue until the week before the vote. But now the economy will be his priority. Which will mean breaking some of his election promises to reduce diesel and jet fuel taxes and the likelihood of a renewed federal budget deficit.
TD Bank is forecasting a government deficit for four years, including $10.4 billion in the 2008-09 budget. In August alone, the budget ran a $1.7 billion shortfall, but Jim Flaherty is still looking at a slight surplus for the year. Given the excellent fiscal position of the Canadian government, short-term deficits should not be a problem.
Harper will also have to address provincial and municipal concerns. The provincial premiers have already requested a First Ministers meeting to discuss the economy and, in particular, accelerated infrastructure spending, transfers to the provinces, the elimination of interprovincial trade barriers and trade talks with the European Union.
Yet, all their good intentions notwithstanding, all bottom lines remain in flux for the foreseeable future since the true 'bottom' in all this chaos has yet to be seen.