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Canadian Economy – Light at the End of the Tunnel?

November 18, 2008

Canada’s slump still looks mild

Stocks swooned again yesterday amid new signs that the U.S. recession would be even more severe than expected, but there was a small ray of sunshine for ordinary Canadians.

While this country can’t escape the serious drag from a U.S. recession, there’s reason to believe that the slowdown in Canada will be a good deal less serious, says a new analysis by National Bank economist Yanick Desnoyers.

Combing through the economic record, Desnoyers was pleased to see how inaccurate it is to believe that Canada’s fate is tied to that of the U.S.

In fact, he concluded, our severe recessions are always self-inflicted, caused by inflation worries leading the Bank of Canada to hike interest rates too high. Happily, the opposite is happening now.

“I cannot exclude the possibility” that Canada will have a mild recession, he said yesterday, but if so, it will be much less painful than the one south of the border.

In terms of the average Canadian worker, for example, Desnoyers expects to see the unemployment rate rise by perhaps one percentage point before job conditions stabilize late in 2009.

That’s certainly unwelcome, representing an addition of about 190,000 workers to the jobless rolls, but it’s only a fraction of the 4.5 percentage points added to Canada’s unemployment in the early 1990s. That’s when the last really severe U.S. recession struck. It’s also a fraction of the deterioration expected in the U.S. this year and next.

The logic behind Desnoyers’ logic is this: Export income in Canada will be cut by the U.S. downturn and a big drop in prices for Canada’s resource products. That’s why we’re entering a slowdown. But to have a severe slump with soaring unemployment, we’d also need a swoon in domestic spending by consumers, businesses and governments.

That’s not happening. Domestic demand, which makes up three-quarters or more of Canadian economic activity, is on track to keep growing, thanks to a central bank that has already slashed interest rates and stands ready to cut even more.

As the last deep recession began here in 1990, the central bank’s target interest rate was a punishing 13.5 per cent, or in more accurate “real” terms after subtracting inflation, fully 10 per cent. That wasn’t just restrictive, it was crushing.

Today, the target rate is 2.25 per cent – in real terms, just half of one percentage point. And it’s likely still more cuts are coming.

Could we even see a real rate below zero?

“Certainly,” Desnoyers said. “It’s already true in the U.S,” he said, and the Bank of Canada is aggressively boosting the economy in this downturn.

Beyond this, as the government adds more economic stimulus through tax cuts or new spending, “we’re in the best position in the world,” notes Desnoyers, since Canada enjoys surpluses in good times.

Of course, the U.S. is also slashing rates and spending like crazy. But it’s starting from a much more difficult position, with its housing market in collapse and the financial system badly damaged.

A new forecast from economist Kurt Karl with Swiss Re, a big insurance firm, makes the point. Karl predicts a “mild” recession in Canada, with the economy shrinking for three quarters, but says that the shrinkage won’t come close to what he expects in the U.S.

By the end of the recession, in the second quarter of next year, Canada’s economic output will be down by a tiny 0.1 per cent from a year earlier. In the U.S, it will have fallen by 1.2 per cent.


The Montreal Gazette

Jay Bryan

Tuesday November 18, 2008

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