Canada heading for recession, say economists

Canada is headed into a worse recession than anyone expected, one that could last until almost 2010, said the country's top economists on Monday.

Staid financial watchers, who usually speak in measured tones, almost screamed the R word in two separate events Monday.

"At this point, if this kind of volatility keeps up, I think we're looking at a much more serious downturn than a mild recession that most of us are talking about," said Doug Porter, with BMO Capital Markets, at a meeting of senior economists in Toronto.

Canada faces a financial perfect storm of a sputtering U.S. economy, tumbling oil prices and falling domestic demand that will conspire to hurt the country's growth prospects for the next few months, they said.

"[We're] forecasting Canadian and U.S. recessions, plus 100 basis points of [Bank of Canada] and Fed cuts that could come at any time. This is not just made-in-U.S.A. weakness as Canada faces its own home-grown recession signals," Scotiabank economists Derek Holt and Karen Cordes said in a morning commentary.

A recession is commonly defined as two or more quarters of negative GDP growth.

If Scotiabank's forecast is correct, the Bank of Canada would cut its overnight lending rate to two per cent from three per cent and the U.S. Federal Reserve would chop the fed funds rate to one per cent from the current two per cent level. 

In Toronto, these practitioners of the dismal science were decidedly more dour as to their expectations of the national economy even into the next year.

TD Bank's Don Drummond said he sees the economy shrinking until late 2009 and then only gradually recovering.

On the campaign trail for the Oct. 14 election, Prime Minister Stephen Harper said that while the country's economic fundamentals were relatively strong compared with other countries, Canada still might need to work up a strategy to fight a possible slowdown.

"We are also watching to make sure that any actions that are taken [elsewhere] don't have any rebound effects on us, so we are putting some secondary plans in place if that becomes necessary," he said at an event Monday morning in Ottawa.

Global oil prices fell below $90 US a barrel at the start of the week; other commodity prices have likewise slipped in recent weeks in the face of slowing world economic growth.

Canadian housing prices have begun to slide as well, although the country will not face a home sector deterioration along the lines of what occurred in the United States, Scotiabank said.

Finally, exports to the United States will dry up as American demand for Canadian products evaporates, economists said.

Scotiabank currently has the Canadian economy growing 0.7 per cent this year and 1.4 per cent in 2009.  This prediction, however, was made on Sept. 9, before the full force of the Wall Street financial meltdown was evident.

BMO Capital Markets expects the economy to grow 1.7 per cent in the July-to-September period but then contracting by 0.4 per cent in the final three months of the year.

Along with Scotiabank, BMO has Canada's economy growing in the 2009, up 1.0 per cent.