Has Canada slipped into recession without anyone noticing?

[ErickMontreal]

Has Canada slipped into recession without anyone noticing?

July 16, 2008 - 6:35 pm

By: Julian Beltrame, THE CANADIAN PRESS

 

OTTAWA - Canada is within a hair's breadth of slipping into a technical recession, economists said Wednesday, a day after the outlook for the North American economy soured sharply.

 

But they add that it won't seem like recessions of the past. In fact, says University of Toronto economist Peter Dungan, Canadians may already have lived through a technical recession - two quarters in a row of a shrinking economy - and not noticed.

 

"Our forecast is there's a recession now," Dungan said. "There may be a slight revision to the first quarter, but the second (which ended June 30) is almost certainly negative.

 

"This is nothing like the recessions we had in the early '90s and early '80s, however, when we had serious recessions and serious unemployment," he added.

 

The early '80s recession came after two major oil price shocks in the 1970s that battered the North American economy and led to a restructuring of heavy industry, especially steel and autos, with the loss of millions of jobs. The early 1990s recession produced widespread bankruptcies in real estate and retail before growth resumed a few years earlier.

 

Speaking in Calgary, Finance Minister Jim Flaherty expressed confidence that the economy would stay on the positive side of the ledger and insisted Ottawa won't fall into a deficit as a result of the slowdown.

 

"We are on track in terms of our budget in Canada, that we will continue to run a surplus," he said, adding that the country's "strong fundamentals" and status as an emerging energy superpower will keep it in better shape than the United States, although not immune to a global economic slowdown.

 

"Canada is not an island," Flaherty said earlier in a speech to a Calgary Chamber of Commerce luncheon.

 

Following a first quarter contraction that saw gross domestic product fall 0.3 per cent and continuing signs of stress, economists and policy makers have been routinely revising their growth projections for the year, all trending downward.

 

In the last week, Canadians have been hit by a series of bad news announcements. Employment fell in June for the first time this year and full-time employment tumbled for the second straight month. Average home sale prices edged down during the month, the first year-over year price decline in nearly a decade. And General Motors Corp. (NYSE:GM) announced plans to lay off 20 per cent of its white collar staff in North America, a further cut of thousands of jobs.

 

Meanwhile, the Bank of Canada warned of rising inflation Tuesday while lowering its 2008 growth forecast from 1.4 per cent in April to one per cent. On Wednesday, the Conference Board of Canada downgraded its projection from 2.2 per cent this spring to 1.7 per cent. For both, it was the second downward revision so far this year.

 

Both are overly optimistic, says David Wolf, chief economist with Merrill Lynch Canada, who says gross domestic product increase will likely come in at a tepid 0.5 per cent this year, a statistical blip from recessionary times.

 

"Absolutely, by the informal definition of recession we could be in recession," agrees Global Insight economist Dale Orr, noting that nobody will know for sure until late in August, when Statistics Canada releases the second quarter growth tally.

 

But Orr also points out that the Canadian economy still has some legs, particularly in the resource and oil and sector, consumer spending, and employment and housing that while slowing, are coming off record-setting years.

 

Even manufacturing showed signs of life in May. Statistics Canada reported Wednesday that manufacturing sales rose 2.7 per cent from April, the fourth increase in five months. The details behind the aggregate number were weaker as sales remain below last year's levels and most of the gain was due to higher prices, not increased production.

 

The strongest pillar remains high-priced commodities, particularly Alberta oil, which is bringing tremendous wealth into the country and helping grease the general economy through corporate profits, job creation, and higher government revenues that get passed along in lower taxes and higher spending.

 

"Perhaps the volume of what we produce is going down, but the wealth effect (from commodity exports) is very much there," said Pedro Antunes of the Conference Board.

 

"We often think that's beneficial for some regions and sectors, but there have been redistributive effects. The federal government has collected dividends that's been fanned out to all Canadians in the form of tax cuts, and the effect on stock prices, wages, employment have been distributed all over the country."

 

That has kept nominal gross domestic product growth - which measures the actual worth of what Canadians produce - above four per cent, as opposed to the flat performance in real growth, which measures the amount produced.

 

"The hurt in Canada is narrowly focused in the trade sector," Orr says. "If you are in Windsor, Ont., where unemployment is near 10 per cent and the value of your home is falling, or in the auto sector, or if you are in a forestry one-industry town in northern Ontario or Quebec or B.C., then you are really hurting."

 

But for most Canadians the slump has yet to register and likely won't if forecasts of a second-half improvement prove accurate. And for those who live off the resource sector, this is boom times, says Orr.

 

Dungan says another difference between today and recessions of the previous two decades is that inflation, while rising, remains relatively tame, and governments now have the wherewithal to stimulate the economy or at least not inflict further harm.

 

"The Bank of Canada is trying to keep inflation from rising, not reduce it, and generally speaking prevention is not as costly and not as unpleasant as cure," he explained.

 

"And our government balances are basically OK. It's not like 1991 when we had huge deficits and therefore you couldn't do anything, if anything you were trying to raise taxes to make those better, which only makes the downturn worse."