Forecasts continue to fall for 2009

With another week comes another group of economic forecasts calling for “worse than expected” declines in the both the global and Canadian economies. Given the their reliance on export markets, Canada’s two most populous provinces — Ontario and Quebec — are going to be hit a lot harder than others.

Economists continue to trim their outlook for the global economy. Most notably, the IMF came out today to downgrade its global economic outlook for the year, which it initially released in January.

The organization is now calling for a 0.6% contraction in global GDP for 2009, compared with its last official forecast of 0.5% growth. It has also lowered its forecast for the U.S. economy by a full percentage point, to a contraction of 2.6%, compared to 1.6%.

A deeper contraction in the U.S. and global economies will have a knock-on effect to Canada’s highly correlated economy. Not surprisingly, most of Canada’s major banks have been releasing reports over the last two weeks with downgraded forecasts.

On Tuesday, Scotiabank predicted a contraction of 2.4% in 2009, in line with forecasts by TD Economics and RBC Asset Management last week, which predict a 2.2% and 2.4% contraction respectively.

The two provinces most dependent on trade with the United States are also the manufacturing heartland of the nation, and they are expected to suffer the most, according to the Scotia report.

The ailing auto industry accounts for 25% of Ontario’s manufacturing output. Quebec’s aerospace industry, which did well in 2008, is facing order deferrals and cancellations as the demand for business jets dries up and air traffic for both passengers and cargo stalls.

Ontario is expected to contract by nearly 3% this year. A provincial economic outlook released by Laurentian Bank foresees Ontario’s official unemployment rate hovering near 10% even after the global financial crisis starts to recede.

“Ontario is experiencing one of the worst years of its career,” says Sébastien Lavoie, economist of Laurentian Bank Securities, which also released a forecast on Tuesday. “Significant full-time job losses in several key sectors will certainly spark a major pullback in domestic demand. The unemployment rate in Canada’s largest province will likely hit 10% between now and 2010 even if restructuring plans at the three big U.S. automakers go ahead.”

Scotiabank expects Quebec to outpace the national contraction, declining by 2.5% in 2009. Lavoie is slightly more positive, predicting a real GDP growth decline of 1.1%.

“The deteriorating job market, coupled with the crunch in financial and real estate asset prices, will spark a pullback in consumer spending. Moreover, the recession will push many of the more vulnerable Quebec households over the brink. Higher personal debt burdens, coupled with the fact that EI benefit payouts provide less support than they once did, are causing bankruptcies to spike earlier in the cycle than during previous recessions,” he says. “Economic uncertainty and slower growth in profits are forcing companies to reduce inventories and to postpone many investment projects until 2010.”

The once-hot resource-rich Western economies are expected to sputter while demand for commodity prices remains low.

“Even the previously booming resource-driven economies in Western Canada have been caught in the middle of the global economic and financial storm,” says Adrienne Warren, senior economist, Scotia Economics. “The sharp falloff in global commodity demand and prices are leading to substantial declines in retail and housing activity, in addition to deep cutbacks in capital spending plans. In Alberta alone, over $40 billion worth of capital projects have recently been postponed or cancelled.”

None of the bank forecasts have broken ranks to predict that a slowdown will continue into 2010. Across the board, forecasters believe 2010 will show recovery as massive government stimulus packages start to revive lending and consumer spending.

Alex Koustas, an economist at Scotiabank, say his bank does expect the recovery to be muted compared to past recoveries. Scotiabank believes the Canadian economy will recover to post a modest growth rate of 1.6% in 2010.

“It’s likely going to be a slower recovery than what we’ve seen in past recessions, where a steep drop was followed by a large rebound,” he says. “Even Ontario and Quebec are expected to have somewhat of a recovery. They have a strong service sector, which is the backbone of both provinces. They’ll both benefit from heavy infrastructure spending.”

As TD’s economic report by its chief economist, Don Drummond, pointed out on Friday, the GDP contraction is not the whole story. There is going to be a significant amount of individual pain for Canadians and Canadian business going into 2010.

“With nominal GDP expected to decline in 2009 as a whole (-4.5%) for the first time on record, this will come to bear on employment, wages, capital investment, and government revenues as the year rolls forward. A big eye-catcher among these components is that from peak to trough, TD Economics expects more than a half-million jobs to be shed by the end of 2009,” TD’s report says. “That’s more than the total job losses experienced during the painful early 1990s recession (-462,000), which is still fresh in the minds of many Canadians.”

(03/17/09)