Bank economists warn of something worse than recession for Canada

[ErickMontreal]

Bank economists warn of something worse than recession for Canada

October 06, 2008

By David Friend, The Canadian Press

 

Economists from Canada’s Big Five banks say they expect little or no growth in the near future and they warned today that the domestic economy’s current gloom will likely deepen into something worse than a recession.

 

The word “recession” wouldn’t describe the deep structural problems affecting everything from the U.S. housing sector to the Canadian oil industry, said Bank of Nova Scotia chief economist Warren Jestin.

 

“You have to invent a new word to describe what we’re in now,” he said after the banks presented their perspectives at the Economic Club today.

 

“It’s being driven through the financial markets into the real economy. All of those things suggest that it’s entirely different than what you might expect from a typical recession.”

 

In their most recent economics forecast, Scotiabank economists predict recessions for both the U.S. and Canada, economic slides that will require central bankers in both countries to cut interest rates by at least a full percentage point.

 

All agree that a slide in commodity prices bodes ill for the Canadian economy, which is heavily dependent on the production and export of oil and gas, metals and minerals.

 

Drops in oil and metals prices have hit the already teetering Toronto Stock Exchange hard. The TSX took an agonizing 1,200-point fall this morning before recovering somewhat to sit around 700 points in the red as oil dropped to trade around the $90 US mark.

 

And Bank of Montreal economist Doug Porter said prices will continue to take a beating over the next year, dragging Western Canada’s formerly booming economy in particular down with them.

 

“You’re going to be seeing Western Canada come back down to the rest of us with a thud, especially if commodity prices keep doing what they’ve done in the last three months,” he said.

 

“It’s almost as if the markets are pricing in a much harder landing for commodity prices. I think that’s reasonable if you don’t get some thawing in the credit markets relatively soon.”

 

Porter said the direction of Canada’s economy depends on whether the financial-sector troubles in the United States start to settle down.

 

“At this point, if this kind of volatility keeps up, I think we’re looking at a much more serious downturn than the mild recession that most of us are talking about,” he said. “Over the next month, that’s what bears watching.”

 

The cautious outlook was echoed by Don Drummond of TD Bank, who said the Canadian economy won’t see any growth until late 2009.

 

Drummond told the Economic Club audience that even at that point there will be only a gradual recovery.

 

“I think the credit system is going to be mucked up for quite some time, even if it improves somewhat,” he said.

 

Jestin remained on the more optimistic side of the loonie’s direction, predicting that it will hold above the 90-cent threshold as it weathers the financial downturn.

 

“I still think the fundamentals on the Canadian currency — those that initially drove it through parity and kept it quite strong by recent history — are largely intact,” he said, pointing out that Canada’s trade numbers still look favourable compared to many other developed countries.

 

Craig Wright, chief economist at RBC Financial Group, held a more pessimistic view on the dollar, predicting it would slide “just under” 90 cents by the end of next year. The loonie was down 1.78 cents to 90.68 cents US this morning and closed slightly higher at 90.98 cents US.

 

“For Canada, exports are going to be a continued challenge by weakness in the U.S., but we’re still relatively bullish on the Canadian economy,” he said.

 

Porter told the audience that it’s tough to provide an accurate outlook on the economy given the unpredictability of capital markets.

 

“Trying to do an economic forecast in this kind of turmoil is a bit like trying to put a value on your house while the kitchen is on fire,” he said. “You just don’t know how long the fire is going to go on for, or how much damage it’s going to do.”