Weaker US growth and tight credit conditions have resulted in Canada’s economy falling into recession according to a report by RBC Economics. The country’s economy will grow by 0.6% in 2008 and then experience no growth in 2009, the report said.
“The US economy has fallen into a deep recession that will likely push the Canadian economy into recession as well,” says Craig Wright, senior vice-president and chief economist, RBC. “However, we expect the slowdown in Canada not to be as severe as in other countries since the imbalances plaguing other countries are more pronounced. We expect to see a moderate, though sustained, recovery in the second half of 2009.”
The report noted that the sharp decline in commodity prices over the past three months will likely cut Canada’s domestic income in 2009, after six years of solid gains. This income supported consumer, business and government spending – the lifeblood of Canada’s strong economic performance for the past several years. For 2009, the combination of falling domestic income growth, tighter credit conditions and a rising debt-to-asset ratio is expected to curb consumer spending. However, residual support from Canada’s strong terms of trade gains should help limit the erosion of investment and consumer spending.
Despite the fact that negative economic growth is only expected to continue for the next two quarters, its impact will be far reaching as Canada’s unemployment rate will climb to a near-term quarterly peak of 7.4% in 2009, the RBC report says.
With growing concerns about the economy and the likelihood of a recession, the Bank of Canada cut the overnight rate by an aggressive 75 basis points in early December to 1.5%, following a cumulative 75 point drop in October. With the economy entering the weakest period for growth another cut in the policy rate to one per cent is likely early next year. However the combination of a weakening Canadian dollar and an expected fiscal stimulus package from the federal government may ease concerns that the central bank could cut rates even further in 2009.
The US economy contracted by one-half of a percentage point in the third quarter, with consumer spending falling at its steepest pace in 28 years. The combination of slower export growth and widespread weakening in global economic activity has set the stage for a much more marked deterioration in the final quarter of this year. RBC expects that US real GDP growth will decline by about 1.5% in 2009 and recover to grow by 2.1% in 2010.
From January to November 2008, US companies cut almost two million employees and the unemployment rate jumped to 6.7% in November, compared to 4.7% a year earlier. The steady deterioration in US labour market conditions is taking its toll on consumer confidence, which slumped to an all-time low in October though recovered modestly in November. Additional fiscal stimulus is likely to come in early 2009 as the new Obama Administration takes office, to help boost both consumer and business spending, the RBC report says.
With the US economy in recession and inflation pressures receding, the Fed aggressively cut its policy rate again in December and committed to keeping policy accommodative and use all tools in its arsenal to support the financial system and promote economic growth.
“The Fed’s commitment to low interest rates and directly supporting markets that are in distress will ultimately lead to narrower credit spreads,” says Wright.
D.C.