U.S. May Have Caused The Trouble,
But Canada Could Suffer MoreWednesday February 25, 2009
Julian Beltrame, The Canadian Press
Consumer confidence hits new lows. Housing prices crumble to 2003 levels. Unemployment insurance claims rise five per cent in one month.
The three sobering indicators reported Tuesday point to an economy that, if not in free-fall, is close to it. But are they describing the severe recession in the United States or Canada?
In actuality, only the third item listed - employment insurance claims - is a Canadian statistic.
But economists say both countries are suffering from the same economic malaise, even though the Canadian federal and provincial governments are in better financial shape and Canada's banking system is among the soundest in the world.
"I know that the conventional wisdom uniformly shared is that Canada will fare better than the U.S., but I wouldn't be so sure," says David Wolf, chief economist for Merrill Lynch, one of the first private-sector analysts to predict a house price collapse in Canada.
"This financial crisis is a bit like a tsunami, and although the epicentre was in the U.S., it doesn't matter how far away you are, the impact depends on what your coast looks like. And Canada has a particularly bad coast because we're a small economy, we're an open economy and it faces the U.S."
Part of the reason is the global nature of the crisis, says TD Bank analyst Richard Kelly, which like a falling tide is sinking all boats.
Fourth quarter economic contractions in Germany (8.2 per cent), Italy (7.1), Japan (12.7), United Kingdom (5.9) are outpacing the U.S.'s 3.9 per cent for the September-December period. Canada's fourth-quarter economic reading, to be released Monday, is expected to show gross domestic product contracted by about 3.5 per cent.
Another reason for the depth of the decline is that Canada's economy is so interlinked with the U.S. that the old adage - when America sneezes, Canada catches a cold - still largely applies.
On Tuesday, Statistics Canada reported that 538,200 Canadians received regular Employment Insurance benefits in December. That's up 25,000 or 4.9 per cent more than in November and applies to a period before 129,000 job losses recorded in January.
In the United States, the Standard & Poor's/Case-Shiller U.S. National Home Price Index plunged more than 18 per cent during the October-December quarter from the prior-year period, the largest drop in its 21-year history.
And the Conference Board said its consumer confidence index, which stood at about 37 last month, plummeted to 25 in February, easily the worst since the group began compiling the measure in 1967.
In testimony before Congress on Tuesday, Federal Reserve chairman Ben Bernanke held out some hope the United State could come out of recession later this year, but also cautioned it could be later. And recovery was contingent on everything going right, he added.
"If actions taken by (the Fed and Obama administrations) are successful in restoring some measure of financial stability, and only if that is the case, in my view there, is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," Bernanke said.
The timing for rebound is similar to his counterpart at the Bank of Canada, although governor Mark Carney believes Canada's bounce-back will be stronger.
Certain fundamentals are stronger in Canada, agrees Wolf, but they won't necessarily result in stronger growth this year than what the U.S. will experience.
While most economists see Canada's economy contracting between 1.5 per cent and two per cent this year, and the U.S. slightly above two per cent, Wolf says he would not be surprised to see the order reversed.
That's because the U.S. entered a recession a year ago and has already made adjustments while Canadian business and consumers are only now starting to cut back. And because they are behind the curve, they are paring more aggressively.
The 129,000 job losses recorded by Statistics Canada in January dwarfs any single month decline south of the border, when the 10-to-one population difference is take into account. As well, December's 5.4 per cent plunge in retail sales is more than any single monthly U.S. contraction.
"There is a view out there that they (U.S.) are terrible and we're OK," said Liberal finance critic John McCallum, a former chief economist with the Royal Bank.
"That's totally wrong. Whether it's worse than the U.S. or better, it's going to be very bad and because we're later into it, it's going to be more of a shock to Canadians."
Bank of Montreal economist Sal Guatieri agrees that Canada and the U.S. could face similar futures in terms of economic growth, or lack of it, but still believes Canada's recession will be milder.
He points out that the U.S. has been in recession for over a year, whereas Canada only entered negative territory in the fall. But the big difference is jobs.
"Gross domestic product is probably not the best measure of economic performance, the best measure is employment," he said. "We could see U.S. job losses exceeding five million before recovery later this year. In Canada, we're likely to see 400,000 total job losses" for the duration of the slump.
That will be cold comfort, he is quick to add, predicting Canada's recession will wind up resembling the downturn in the early 1990s, "which was a severe recession."
