Banks' chief economists say it will be a close call for Canada's economy

Canada will not "technically" experience an economic recession this year, even though many of the conditions may be in place, senior economists say.

"There will be a general weakening, but we don't believe it will turn into a recession," TD Bank chief economist Don Drummond told a recent Economic Club of Toronto meeting.

Drummond, who was joined by several other economists at the event, predicted the critical gross domestic product (GDP) indicator will average out at growth of about 1.9 per cent by the end of this year.

"The economy is going to be weak, we've all said that. I think that's the key thing. The challenge is going to be whether it satisfies the technical (aspect of) a recession or not," said Drummond.

Photo courtesy Alessandro Garofalo, ECOT
Warren Jestin, left, Avery Shenfeld and Craig Wright were among several economists at the ECOT event.

A recession is defined by most economists as a significant decline in activity across the country spread over at least two fiscal quarters. Unemployment goes up, consumer spending goes down and companies cut back on production, often in a spiral-like effect.

Traditionally, the Bank of Canada will cut interest rates to restart consumer spending before a potential recession goes too far.

BMO chief economist Sherry Cooper agrees this year will be a close call. "We sure are not far from it and it will feel like a recession," she said.

Later during the Toronto meeting, Cooper cautioned people not to read too much into the monthly numbers. "I get calls from people all the time, especially the media, asking what I think of this particular month's numbers. They ask me if it's a trend. I tell them, 'You have to look at the overall picture over a period of time for any trends.' " Cooper predicted GDP average growth of about 2.2 per cent in 2008, which matches what the Bank of Canada called for in its own economic forecast last October.

CIBC World Markets chief economist Avery Shenfeld said people have been fooled in the past by thinking an economic slowdown was an important trend. "We should remind ourselves that other slowdowns in the past looked like recessions, but they didn't end up being so," said Shenfeld.

The biggest indicators to watch will be countries outside Canada, including the U.S. and Russia, noted Bank of Nova Scotia senior economist Warren Jestin.

"Russia will be very big. They have the resources the world wants and it will be very interesting to see how that plays out in the world market.”

Jestin said the most stable factor now on the horizon is Canadian population growth and aging, while the most unstable variable is the U.S. dollar.

The economists showed their sense of humour on the topic of U.S. elections.

"The real problem is, I don't think any of the candidates know where Canada is," Drummond joked. "Left-leaning democratic governments seem to pay special attention to cleaning up financial messes, but that's all speculative. Anything could happen."

Jestin said he would like to hear more from the U.S. candidates about immigration and border protection issues. "The challenge is to convince the U.S. we are not a threat, but a strong partner," he said.

Meanwhile, prospects for the individual provinces remain strong this year, Royal Bank chief economist Craig Wright said in an interview.

"The oil and gas industry will always be strong in Alberta, even with the issue of royalties," he told Business Edge. "Companies have too much money invested in the province that they can't just walk away.”

He added B.C. should continue to post strong employment and spending numbers leading up to the 2010 Olympics, while Ontario's pace will moderate slightly.

However, three recent reports are not as bullish about Canada's chances of escaping any recession.

The first report, from U.S.-based economic forecasting firm Global Insight, said Ontario has the most to lose if the U.S. economy goes through a mild recession.

Assuming the U.S. economy grows 1.9 per cent and the Canadian economy posts growth of 2.2 per cent this year, these are the "weakest rates of growth since 2003 and well below the medium-term sustainable paces, near the three-per-cent range," according to the report.

The forecast also says softwood lumber exports from British Columbia will weaken, along with incomes and profits, if the U.S. housing market drops further. Canada's exports of machinery, autos and other goods are also vulnerable.

"This will have a negative impact on all provinces, but particularly Ontario," the report adds.

Global Insight predicts a 40-per-cent chance of a recession in the United States this year and a 25-per-cent chance of one happening in Ontario.

Meanwhile, New York-based investment bank Goldman Sachs sent a note to clients saying it expects the U.S. economy to go into a recession this year, which should prompt the Federal Reserve to slash benchmark lending rates to 2.5 per cent from 4.25 per cent by the third quarter of 2008, Reuters news agency reports.

A Merrill Lynch report that same week said the U.S. economy was already in a recession.

Statistics Canada has grim economic news of its own. A record 18,700 jobs were lost in December, the highest level since May 2003. Most of the cuts came from the manufacturing sector, which was still showing the effects of last year's soaring Canadian dollar and slower U.S. demand.

A new poll of Canadians' economic expectations for the year ahead shows the most pessimistic levels in almost 25 years.

The poll, done by Pollara Inc. for the Economic Club of Toronto, showed 40 per cent of people believe they lost ground financially in 2007 and another 50 per cent expect their household income to fall behind the cost of living in 2008.

Pollara chairman Michael Marzolini said that while 65 per cent of Canadians believe the country is in a period of moderate growth, 31 per cent expect the economy to improve and 26 per cent believe it will worsen. Another 61 per cent of Canadians believe the U.S. economy will worsen next year.

The poll also showed 26 per cent of Canadians expect the employment situation to improve, while 28 per cent believe it will get worse and 38 per cent say it will remain unchanged.

Marzolini said about 36 per cent of Canadians expect the country's debt to increase this year while 38 per cent believe it will decrease and 19 per cent said it would not change.

"This is the first glimpse of optimism on this issue in 24 years of tracking public opinion," Marzolini said. "It shows increased communications by the (Stephen) Harper government are paying off with the public."

Partly operating under its former name of Insight Canada Research, Pollara did all the polling for the Liberal Party of Canada during the 1993, 1997 and 2000 election campaigns. The company name was changed to Pollara in 1997.

(David Hatton can be reached at hatton@businessedge.ca)