Forecasts for 2009 remain bleak

The Canadian economy is in recession and will experience virtually no growth in 2009, according to an economic forecast out of RBC Economics. The weakness of the second half of 2008 has already pretty much wiped out any gains made earlier in the year, slashing growth to just 0.6%.

“We expect the slowdown in Canada not to be as severe as in other countries since the imbalances plaguing other countries are more pronounced,” said Craig Wright, senior vice-president and chief economist, RBC. “We expect to see a moderate, though sustained, recovery in the second half of 2009.”

The slumping global economy has brought the six-year binge on Canadian commodities to an end, which will have a rapid domino effect through the overall economy, the report says.

Falling income growth, combined with tighter credit conditions, will curb consumer spending, which has been the driver of economic growth both in Canada and the U.S. over the past six years.

The unemployment rate is expected to creep higher in the first half of the year, peaking at 7.4% in 2009.

The Bank of Canada is expected to continue its stimulative monetary policy, cutting interest rates by an additional 50 basis points to 1.0% in the new year. Further cuts are unlikely, however, as the Bank will be wary of devaluing the dollar.

Besides, there is only so much that policy-makers in Canada can do to stimulate the economy. Sustainable growth will only resume when the rest of the world — the U.S. in particular — recovers from recession.

The American unemployment rate rose to 6.7% by November, up from 4.7% in November 2007, as almost 2 million jobs disappeared.

President-elect Barack Obama has pledged a $775 billion stimulus package aimed at shoring up the U.S. economy.

The U.S. economy contracted in Q3 of 2008 by 50 basis points, as the consumer spending spree that powered the past six years of growth finally sputtered to a halt. American real GDP growth is expected to decline by 1.5% in 2009, before staging a 2.1% recovery in 2010.

With the stock market serving as a forward indicator, 2009 could see the beginning of a recovery in equities, but investors may have to wait until the summer, according to a forecast issued by CIBC World Markets. Senior economist Avery Shenfeld even suggests that markets could be “glorious” in the summer.

He points out that the S&P 500 index continues to hover around the same level as in mid-October, which could mean it has bottomed out. Meanwhile the S&P/TSX has trended sideways, despite the unrelenting decline in the price of oil.

“The North American equity market has become an oasis of relative calm in recent weeks,” Shenfeld says. The report says that current stock market valuations have already priced in as much bad news as they can.

Central banks around the world have slashed interest rates — most notably, the U.S. Fed has cut its trendsetting rate to between zero and 0.25% — which should provide some stimulus. If the global economy begins to recover in mid-2009, demand for resources should boost Canadian equity markets.

On the domestic front, growth is expected to be spurred by government spending, as consumers lock up their mostly empty coffers. The savings rate is expected to rise, finally, after years of erosion.

“If fiscal policy is going to boost overall spending, the government will have to do the first round of buying itself,” say Shenfeld and senior economist Benjamin Tal. “Efforts to line consumers’ pockets through temporary tax relief could simply see the funds diverted to savings, as we saw with much of the rebate given to Americans in the second quarter of 2008.”

(12/22/08)